Question

Assume a merchandising company uses the high-low method to separate any mixed costs into their variable and fixed elements. It provided the following income statements:

May June July

Sales in units 4,800   5,000   5,500

Sales$168,000  $175,000  $192,500

Cost of goods sold 86,400   90,000    99,000

Gross margin 81,600   85,000   93,500

Selling and administrative expenses:           

Advertising 17,000   17,000   17,000

Shipping 16,800   17,500   19,250

Salaries and commissions 29,600   30,000   31,000

Total selling and administrative expenses 63,400   64,500   67,250

Net operating income$18,200  $20,500  $26,250

What is the estimated net operating income if the company sells 5,100 units?

Answer 1

Selling price per unit:

= $168,000 / 4,800

= $35

Cost of goods sold per unit:

= $86,400 / 4,800

= $18

Advertising expense = $17,000

Shipping expense per unit:

= $16,800 / 4,800

= $3.50

Varible salaries and commission:

= ($30,000 - $29,600) / (5,000 - 4,800)

= $2

Fixed salaries and commission:

= $30,000 - ($2 X 5,000)

= $20,000

Net operating income when 5,100 units sold:

= [($35 - $18 - $3.50 - $2) X 5,100] - $17,000 - $20,000

= $21,650