Arlo\'s T-shirt shop only has four costs: T-shirt cost, rent cost on the shop, s
ID: 2502374 • Letter: A
Question
Arlo's T-shirt shop only has four costs: T-shirt cost, rent cost on the shop, shipping cost, and utilities cost. Arlo's sells the T-shirt for $21 each. Management has prepared the following estimated cost information for next month:
At 10,000 t-shirts
At 20,000 t-shirts
T-shirt cost
$45,000
$90,000
Rent cost
$27,000
$27,000
Shipping cost
$28,000
$38,000
Utilities cost
$28,000
$33,000
Assume that all of the activity levels mentioned in this problem are within the relevant range. Use the High-low method to determine the cost formulas for each cost. (HINT: first determine which costs are fixed, variable or mixed. For mixed costs, use the high-low method to determine the cost line equation for that cost).
REQUIRED:
1. Calculate what Arlo's should expect for total variable cost if 9,000 t-shirts are sold next month (include purely variable costs and the variable portion of mixded costs).
2. Prepare Arlo's contribution approach income statement for a monthly sales volume level of 21,000 t-shirts (remember, the mixed costs have both a fixed element and a variable element.)
At 10,000 t-shirts
At 20,000 t-shirts
T-shirt cost
$45,000
$90,000
Rent cost
$27,000
$27,000
Shipping cost
$28,000
$38,000
Utilities cost
$28,000
$33,000
Explanation / Answer
T-SHIRT COST
VARIABLE COST = (90000-45000)/((20000-10000)
=4.5 PER T.SHIRT
RENT COST IS FIXED COST = 27000
SHIPPING COST
VARIABLE COST = (38000-28000)/(20000-10000)
= 1 PER T.SHIRT
FIXED COST = 28000-(10000*1)
=18000
UTILITIES COST
VARIABLE COST = (33000-28000)/(20000-10000)
=0.5 PER T.SHIRT
FIXED COST = 28000-(0.5*10000)
=23000
1]TOTAL VARIABLE COST IF 9000 T-SHIRTS ARE SOLD = [4.5+1+0.5] * 9000
=54000
2]INCOME STATEMENT for a monthly sales volume level of 21,000 t-shirts
SALES [21000*21] = 441000
LESS:-VARIABLE COST
(a)T-SHIRT COST [4.5*21000] = (94500)
(b)SHIPPING COST [1*21000] =(21000)
(c) UTILITIES COST [0.5*21000] = (10500)
CONTRIBUTION = 315000
LESS:-FIXED COST
(a)SHIPPING COST = (18000)
(b) UTILITIES COST = (23000)
(c) RENT COST = (27000)
NET INCOME = 247000
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