Question

P6A - A High-Low Method Contribution Form Income Statement Orange Company Income Statements For the three months ended June 30, 202X big May Sales in units 7,000 10,000 April Small June 9,000 $ 280,000 $ 400,000 $360,000 210,000 300,000 270,000 $ 70,000 $ 100,000 $90,000 Sales Cost of goods sold Gross margin Operating expenses: Advertising Depreciation Rent Salaries and commissions Utilities Total operating expenses Net income $ 5,000 $ 5,000 $ 5,000 3,000 3,000 3,000 8,000 8,000 8,000 34,000 40,000 38,000 12,500 17,000 15,500 $ 62,500 $ 73,000 $ 69,500 $ 7,500 $ 27,000 $ 20,500 Required: 1) Classify each of the six expenses, including cost of goods sold, as variable, fixed or mixed. 2) For each of the mixed expenses found in requirement (1), find the cost equation stated in the form: Y = a + bx. 3) Prepare the income statement, for June, in contribution form.

Answer 1

Variable costs are the cost which tends to directly vary with the volume of activity.

Fixed expenses are costs which do not vary with the change in the volume of activity.

Mixed Cost are the costs that contain both fixed and variable elements. They partly change with the change in the level of activity.

1. Classification of the each of the expenses -

5000 Cost of unit sold Advertising Depreciation Rent Salaries and commission Utilities April |May June Classification 30 30 30 Per unit cost remain same therefore "variable" 5000 5000 does not change with the sales volume therefore "fixed" 3000 3000 3000 does not change with the sales volume therefore "fixed" 8000 8000 does not change with the sales volume therefore "fixed" 4.00 4.22 per unit cost & total cost change with the sales volume therefore "mixed" 1.72 per unit cost & total cost change with the sales volume therefore "mixed" 8000 4.86 1.79 1.70

2. Finding of the cost equation Y = a + bx -

using the High low method, variable cost per unit = (Highest activity cost - lowest activity cost)/(Highest activity unit - lowest activity units)

salaries & commission, variable cost per unit = (40000 - 34000)/(10000 - 7000)

= 6000/3000

= 2000

Fixed part of salaries & commission = Highest Activity Cost – (Variable Cost Per Units * Highest Activity Units)

= 40000 - (2*10000)

= 40000 - 20000

= $ 20000

Cost equation of salaries and commission Y = 20000(a) + 2(b)*10000(x)

Utilities variable cost per unit = (17000 - 12500)/(10000 - 7000)

= 4500/3000

= $ 1.5

Fixed cost = 17000 - (1.5*10000)

= 17000 - 15000

= 2000

Cost equation of Utilities Y = 2000(a) + 1.5(b)*10000(x)

3. Preparation of the income statement, for june in contribution format -

Orange Company Contribution format income statement for the three months ended June 30, 202X April May June $ 280,000 $ 400,000 $360,000 a $ $ $ $ $ 210,000 $300,000 $ 270,000 14,000 $ 20,000 $ 18,000 10,500 $ 15,000 $ 13,500 234,500 $ 335,000 $ 301,500 45,500 $ 65,000 $ 58,500 b Sales value variable expenes: Cost of goods sold Salaries & cmmission @ $2 Utilities Cost @ $ 1.5 Total Variable cost Contribution Margin (a-b) Fixed cost: Advertising Depreication rent Salaries & cmmission Utilities Cost Total Fixed cost с $ $ $ $ $ $ 5,000 $ 3,000 $ 8,000 $ 20,000 $ 2,000 $ 38,000 $ 5,000 $ 3,000 $ 8,000 $ 20,000 $ 2,000 $ 38,000 $ 5,000 3,000 8,000 20,000 2,000 38,000 Net Income $ 7,500 $ 27,000 $ 20,500

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