Arnall Ltd a British merchandising company is the exclusive

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 April May June Sales in units 1,200 4,500 6,100 £204,000 98,400 £765,000 £1,037,000 500,200 Sales revenue 369,000 Cost of goods sold Gross margin Selling and administrative expenses 105,600 396,000 536,800 Shipping expense Advertising expense Salaries and commissions Insurance expense Depreciation 26,900 47,000 84,600 8,000 30,300 63,200 47,000 243,000 8,000 30,300 80,800 47,000 319,800 8,000 30,300 expense Total selling and administrative expenses 196,800 391,500 485,900 Net operating income (loss) £ (91,200) £ 4,500 E 50,900

Solution

Variable Cost Fixed Cost Formula Shipping Expense 11 Per unit 13700 y= 13700 + 11 X Salaries and commission expense 48 Per unit 27000 y= 27000 + 48 X Analysis of the mixed expenses Units Shipping Expense Salaries and Commissions High level of activity 6100 80800 319800 Low level of activity 1200 26900 84600 Change 4900 53900 235200 Variable cost element: Variable cost per unit = Change in cost / Change in activity Shipping expense = 53900/4900 11 per unit Salaries and Commissions = 235200/4900 48 per unit Fixed cost element: Shipping Expense Salaries and Commissions   Cost at high level of activity 80800 319800   Less variable cost element:       6100 units × £11 per unit 67100       6100 units × £48 per unit 292800   Fixed cost element 13700 27000 Amall ltd Income Statement For the Month Ended June 30   Sales revenue 1037000   Variable expenses:        Cost of goods sold 500200        Shipping expense 6100*11 67100        Sales commissions 6100*48 292800 860100   Contribution margin 176900   Fixed expenses:        Shipping expense 13700        Advertising expense 47000        Sales salaries 27000        Insurance expense 8000        Depreciation expense 30300 126000   Net operating income 50900