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)


Less: Cost of Goods sold


Gross Margin










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.


  1. Express the cost of goods sold and the selling expenses interms of cost equations. Hint: y=ax+b
  2. Redo the above income statement using a contribution marginapproach.


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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