Arnall Ltd., a British merchandising company, is the exclusive distributor of a

Question

Arnall 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:

(Note: Arnall Ltd.’s income statement has been recast in the functional format common in the United States. The British currency is the pound, denoted by £.)

Identify each of the company’s expenses (including cost of goods sold) as either variable, fixed, or mixed.

Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense. (Enter mixed expenses in the order of company expenses provided under question.)

Redo the company’s income statement at the 6,100-unit level of activity using the contribution format.

Arnall 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:

Arnall Ltd Comparative Income Statements For the Three Months Ended June 30 May June Sales in units 1,700 5,100 6,100 Sales revenue Cost of goods sold E 323,000 129,200 969,000 1,159,000 387,600 463,600 Gross margin 193,800 581,400 695,400 Selling and administrative expenses Shipping expense Advertising expense Salaries and commissions Insurance expense Depreciation expense 40,300 54,000 93,100 7,600 47 400 81,100 54,000 239,300 7,600 47 400 93,100 54,000 282,300 7,600 47 400 Total selling and administrative expenses 242,400 429,400 484,400 Net operating income (loss) £ (48,600) 152,000 E 211,000

Explanation / Answer

1) Expenses Cost of goods sold Variable Shipping expense Mixed Advertising expense Fixed Salaries & Commission Mixed Insurance Expense Fixed Depreciation expense Fixed Variable Fixed Formula 2) cost cost Shipping expense 12 per unit 19,900 Y= 19,900 + 12X Salaries & Commission 43 per unit 20,000 Y= 20,000 + 43X units Expenses high 6,100 93,100 low 1,700 40,300 Change 4,400 52,800 Variable cost per unit = 52800/4400 12 per unit Fixed cost   93,100   - 6100*12 19900 units Expenses high 6,100 282,300 low 1,700 93,100 Change 4,400 189,200 Variable cost per unit = 189200/4400 43 per unit Fixed cost   282300-6100*43 20000 3)            Income Statement Sales revenue 1,159,000 Variable expense Cost of goods sold 463,600 shipping expense 73200 Salaries and commission expense 262300 total variable expense 799,100 Contribution margin 359,900 Fixed expenses: Shipping expense 19,900 Advertising expense 54,000 Salaries and commission expense 20,000 Insurance 7,600 Depreciation 47,400 Total fixed expenses 148,900 Net Operating income 211,000

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