Question

Frankel Company Traditional Income Statement For the 3 months ending September 30, 2020 Sales in units July 4,000 August 4,500 September 5,000 Sales $ 400,000 $450,000 $500,000 Cost of goods sold 240,000 270,000 300,000 Gross Margin 160,000 180,000 200,000 Selling & Administrative Expenses: 2 Advertising 21,000 21,000 21,000 3 Shipping 34,000 36,000 38,000 4 Salaries and commissions 78,000 84,000 90,000 -5 Insurance 6,000 6,000 6,000 16 Depreciation 15,000 15 000 15,000 17 Total Selling & Administrative Expenses 154,000 162.000 170,000 18 19 Net Operating Income S 6.000 $ 18.000 s 30.000 20 21 22 Required: 23 1. Use the high low method to determine the cost equation for each item on the income statement. 24 2. Using the cost equations, create the contribution income statement for 5,000 units. 25 3. Using the cost equations, create the contribution income statement for 4,800 units. 26 27

Answer 1

**Variable Costs: Variable costs are those cost that are incurred by the firm as a result of the use of variable factor inputs. They are dependent of the level of input.

**Fixed Costs: Fixed costs are those cost that are incurred as a result of the use of fixed factor inputs, It remains fixed at any level of output in the short run.

**Sales - Total Variable Cost = Contribution Margin
**Contribution Margin - Fixed Cost = Operting Profits.

July August September 4,000 4,500 5,000 $ 400,000 $ 450,000 $ 500,000 August 4,000 100 $ September 4,500 5,000 100 $ 100 60 4 $ 240,000 $ 270,000 $ 300,000 $ 16,000 $ 18,000 $ 20,000 $ 48,000 $ 54,000 $ 60,000 $ 304,000$ 342,000$ 380,000 $ 96,000 $ 108,000 $ 120,000 Summary: July Sales (Units) Sales $ Less: Variable Cost Cost of goods sold $ Shipping $ Salaries and Commission $ Total Variable Cost $ Contribution Margin $ Fixed Cost Advertising $ Insurance $ Depreciation $ Total Fixed Cost $ 60 $ 4 $ 12$ 76 $ 24 $ 60 $ 4 $ 12 $ 76 $ 24 $ 12 76 Sales (Units) Sales Less: Variable Cost Cost of goods sold Shipping-Variable Salaries and Commissions-Variable Total Variable Cost Contribution Margin Less: Fixed Cost Advertising Shipping-Fixed Salaries and Commissions-Fixed Insurance Depreciation Total Fixed Cost Net Operating Income 24 $ $ $ $ $ $ $ 21,000 $ 18,000 $ 30,000 $ 6,000 $ 15,000 $ 90,000 $ 6,000 $ 21,000 $ 18,000 $ 30,000 $ 6,000 $ 15,000 $ 90,000 $ 18,000 $ 21,000 18,000 30,000 6,000 15,000 90,000 30,000 21,000 $ 6,000 $ 15,000 $ 42,000 $ 21,000 $ 6,000 $ 15,000 $ 42,000 $ 21,000 6,000 15,000 42,000

1 Cost of goods sold High-Low Method: Variable cost= $ 60,000 $ 60 Highest cost - Lowest cost Highest units - Lowest units $300,000 - $240,000 5,000 - 4,000 1000 Fixed cost = Highest cost - (Variable cost * Highest unit) $300,000 - ($60*5,000) $300,000 - 300,000 $0.00 Shipping High-Low Method: Variable cost $ 4 Highest cost - Lowest cost Highest units - Lowest units $38,000 - $34,000 5,000 - 4,000 4,000 $ 1000 Fixed cost Highest cost - (Variable cost * Highest unit) $38,000 - ($4*5,000) $38,000 - 20,000 $18,000.00 Salaries and commissions High-Low Method: Variable cost= $ 12,000 $ 12 Highest cost - Lowest cost Highest units - Lowest units $90,000 - $78,000 5,000 - 4,000 1000 Fixed cost Highest cost - (Variable cost * Highest unit) $90,000 - ($12*5,000) $90,000 - 60,000 $30,000.00

N Amount 5,000 $ 500,000 (5,000*$100] $ 300,000 (5,000*$60) $ 20,000 (5,000*$4] $ 60,000 (5,000*$12] $ 380,000 (5,000*$76] $ 120,000 (5,000*$24] Sales (Units) Sales Less: Variable Cost Cost of goods sold Shipping-Variable Salaries and Commissions-Variable Total Variable Cost Contribution Margin Less: Fixed Cost Advertising Shipping-Fixed Salaries and Commissions-Fixed Insurance Depreciation Total Fixed Cost Net Operating Income $ 21,000 Given $ 18,000 Fixed $ 30,000 Fixed $ 6,000 Given $ 15,000 Given $ 90,000 $ 30,000

3 Amount 4,800 $ 480,000 (4,800*$100] 3 Sales (Units) Sales Less: Variable Cost Cost of goods sold Shipping-Variable Salaries and Commissions-Variable Total Variable Cost Contribution Margin Less: Fixed Cost Advertising Shipping-Fixed Salaries and Commissions-Fixed Insurance Depreciation Total Fixed Cost Net Operating Income $ 288,000 [4,800*$60) $ 19,200 [4,800*$4] $ 57,600 [4,800*$12] $364,800 (5,000*$76] $ 115,200 [5,000*$24] $ 21,000 Given $ 18,000 Fixed $ 30,000 Fixed $ 6,000 Given $ 15,000 Given $ 90,000 $ 25,200

-------------------------------

If you have any queries/doubts,Immediately drop your messages in the comment box !!!! I will help you...
Thanks!!!