Lies Inc. prepared the followi
Lies Inc. prepared the following report for the first quarter ofthis year:
|
Sales (2,500 units @ $2,800 per unit) |
$7,000,000 |
|
|
Less: Cost of Goods sold |
$3,840,000 |
|
|
Gross Margin |
$3,160,000 |
|
|
Less: |
||
|
SellingExpense |
$1,024,000 |
|
|
AdministrativeExpense |
$1,000,00 |
$2,024,000 |
|
Income |
$1,136,000 |
Lie’s controller, Billy Baroo, studied the costs in detail,particularly focusing on cost behaviour. Her analysis revealed thefollowing:
- Sixty-five percent of the cost of goods sold was variable withrespect to the number of units.
- Of the selling expenses, $800,000 was fixed; the remaining wasvariable with respect to the number of units.
- All of the administrative expenses were fixed.
Required:
- Express the cost of goods sold and the selling expenses interms of cost equations. Hint: y=ax+b
- Redo the above income statement using a contribution marginapproach.
Answer:
| Cost ofg goods sold: | 38,40,000 | ||||
| Less: variable portion (65% of3840,000) | 2496000 | ||||
| Fixed portion of COGS | 13,44,000 | ||||
| Variable cost per unit(2496000/2500) | 998.40 | ||||
| COGS = 1344,000 + 998.40x | |||||
| Selling expenses | 1024000 | ||||
| Less: Fixed | 800000 | ||||
| variableportion | 224000 | ||||
| Divide: Units | 2500 | ||||
| Variable portion per unit | 89.6 | ||||
| Selling expense = 800,000 +89.60x | |||||
| Contribution Margin IncomeStatemetn | |||||
| Revenue (2500*2800) | 70,00,000 | ||||
| Less: Variable cost | |||||
| COGS (998.40*2500) | 2496000 | ||||
| Selling expense(89.60*2500) | 224000 | ||||
| Total Variable cost | 2720000 | ||||
| Contributionmargin | 42,80,000 | ||||
| Less: Fixed cost | |||||
| COGS | 1344000 | ||||
| Sellingexpenses | 800000 | ||||
| Admin expense | 1000000 | ||||
| Total Fixed cost | 3144000 | ||||
| Net Income | 11,36,000 | ||||
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