Chapter 2, Problem 16P

To determine

Mixed cost: Mixed cost is a cost that includes both the fixed cost and the variable cost. It represents the total cost of the activity or production.

Variable Cost: Variable cost is a cost that changes when the volume of production changes, in the same direction and in the same proportion.

Fixed Cost: Fixed cost is a cost that remains constant irrespective of the changes in the production volume.

High-low method: High-low method is a method of calculating the variable cost and the fixed cost of a product or service. The calculation of this method is based on the total production/activity cost and the lowest production/activity cost of the product during any period.

Income Statement: Income statement is a financial statement that shows the net income or loss for a particular period. It is the summary of expenses and income of a particular period.

1. Each of the company's expenses (including cost of goods sold) as variable, fixed, or mixed.
2. Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense.
3. The company's income statement at the 5,000-unit level of activity using the contribution format.

Answer to Problem 16P

Solution:

1. Cost classification of the company’s expenses is done.
2. Each mixed expense is separated into variable and fixed elements and the cost formula for each mixed expense is prepared.
3. Income statement at the 5,000-unit level of activity using the contribution format is prepared.

Explanation of Solution

1. Cost classification is as under

Expenses	Classification
Cost of goods sold	Variable
Advertising expense	Fixed
Shipping expense	Mixed
Salaries and commissions	Mixed
Insurance expense	Fixed
Depreciation expense	Fixed

Explanations of the cost classification

Expenses	Classification
Cost of goods sold	Variable	Per unit cost is same in all month.
Advertising expense	Fixed	Constant irrespective of changes in the number of units sold
Shipping expense	Mixed	Per unit cost is not same in all month.
Salaries and commissions	Mixed	Per unit cost is not same in all month.
Insurance expense	Fixed	Constant irrespective of changes in the number of units sold
Depreciation expense	Fixed	Constant irrespective of changes in the number of units sold

2. a. Shipping expenses per unit is $4 & fixed shipping expense is $18,000 and the cost formula for each shipping expense is:
3. b. Salaries and commissions per unit is $4 & fixed shipping expense is $18,000 and the cost formula for each shipping expense is:
4. Income statement at the 5,000-unit level of activity using the contribution format is as below.

Morrisey & Brown, Ltd.
Income Statement
For the month ended September 30
Sales in units		5,000.00
Sales ( 5000 unit sold)		$500,000.00
Less : Variable expenses
Cost of goods sold	$300,000.00
Shipping expenses	$20,000.00
Salaries and commissions	$60,000.00	-$380,000.00
Contribution margin		$120,000.00
Less : Variable expenses
Advertising expenses	$21,000.00
Insurance expense	$6,000.00
Shipping expenses	$18,000.00
Salaries and commissions	$30,000.00
Depreciation expenses	$15,000.00	$90,000.00
Net Operating Income		$30,000.00

Calculations:

a.) Cost formula for shipping expenses

Step 1: Identify high and low activities level.

Particulars	Cost/Unit	Month
(X1) : Total cost of highest activity	$38,000	September
(X2) : Highest activity unit	5,000	September
(Y1) : Total cost of lowest activity	$34,000	July
(Y2) : Lowest activity unit	4,000	July

Step 2: Calculate the variable cost per day









Step 3: Calculate the fixed cost





=



Step 4: Cost formula for shipping expense.





Where X is the number of units sold per month and Y is total shipping expense.

b.) Cost formula for Salaries and commissions

Step 1: Identify high and low activities level.

Particulars	Cost/Unit	Month
(X1) : Total cost of highest activity	$90,000	September
(X2) : Highest activity unit	5,000	September
(Y1) : Total cost of lowest activity	$78,000	July
(Y2) : Lowest activity unit	4,000	July

Step 2: Calculate the variable cost per day







Step 3: Calculate the fixed cost









Step 4: Cost formula for shipping expense.





Where X is the number of units sold per month and Y is total Salaries and commission.

Conclusion

Thus, for Morrisey & Brown, Ltd., cost classification is done, the cost formula & the income statement are determined and the calculations are explained.