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Frankel Ltd. , a British merchandising company

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PROBLEM 2–18 Cost Behavior; High-Low Method; Contribution Format
Income Statement
[LO3, LO4, LO5]
Frankel Ltd. , a British merchandising company, is the exclusive
distributor of a product that is
gaining rapid market acceptance. The company’s revenues and expenses
(in British pounds) for the
last three months are given below:
Frankel Ltd.
Comparative Income Statements
For the Three Months Ended June 30
April May June
Sales in units . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,000 3,750 4,500
Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .
£420,000 £525,000 £630,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . .
168,000 210,000 252,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . .
252,000 315,000 378,000
Selling and administrative expenses:
Shipping expense . . . . . . . . . . . . . . . . . . . . . . . 44,000
50,000 56,000
Advertising expense . . . . . . . . . . . . . . . . . . . . . 70,000
70,000 70,000
Salaries and commissions . . . . . . . . . . . . . . . . 107,000 125,000 143,000
Insurance expense . . . . . . . . . . . . . . . . . . . . . . 9,000 9,000 9,000
Depreciation expense . . . . . . . . . . . . . . . . . . . . 42,000
42,000 42,000
Total selling and administrative expenses . . . . . . 272,000 296,000 320,000
Net operating income (loss) . . . . . . . . . . . . . . . . . £
(20,000) £ 19,000 £ 58,000
(Note: Frankel Ltd.’s income statement has been recast in the
functional format common in the United
States. The British currency is the pound, denoted by £.)
Required:
1. Identify each of the company’s expenses (including cost of goods
sold) as either variable,
fixed, or mixed.
2. Using the high-low method, separate each mixed expense into
variable and fixed elements.
State the cost formula for each mixed expense.
3. Redo the company’s income statement at the 4,500-unit level of
activity using the contribution
format.

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