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Income Statement

For the Three Months Ending September 30th

July August September

Sales in Units 4,000 4,500 5,000

Sales Revenue $ 400,000 $ 450,000 $ 500,000


Cost of Goods Sold 265,000 295,000 325,000
Gross Margin 135,000 155,000 175,000
Selling and Administrative Expenses:
Advertising expense 14,000 14,000 14,000
Shipping expense 20,000 22,500 25,000
Salaries and commissions 78,000 84,000 90,000
Insurance expense 6,000 6,000 6,000
Depreciation expense 15,000 15,000 15,000
Total Selling and Administrative Expen 133,000 141,500 150,000
Net Operating Income $ 2,000 $ 13,500 $ 25,000
1) Identify each of the company's expenses as either variable, fixed, or mixed. For the FC list the total fixed costs per month
VC list the variable cost per unit for each month. For MC list the average cost per unit for each mixed cost per month.
July August September
Fixed Costs
Advertising $ 14,000.00 $ 14,000.00 $ 14,000.00
Insurance $ 6,000.00 $ 6,000.00 $ 6,000.00
Depreciation $ 15,000.00 $ 15,000.00 $ 15,000.00

Variable Costs
Shipping per unit $ 5.00 $ 5.00 $ 5.00

Mixed Costs
Cost of Goods Sold per unit $ 66.25 $ 65.56 $ 65.00
Salaries and Commisions per unit $ 19.50 $ 18.67 $ 18.00

2) Using the high-low method, separate each of the mixed expenses into variable and fixed elements. State the cost equatio
cost. You may have more than one mixed cost.
Salaries/Commissions Cost of goods sold
Variable Rate $ 12.00 $ 60.00
Fixed Cost $ 30,000.00 $ 25,000.00
Cost Formula Y=12x+30,0000 Y=60x+25,000

It's Ok to type the cost formula directly into the cells, although you will not receive cred
not calculated using Excel cell references and formulas.

3. Morrisey and Brown expect to sell 6,000 units in October. Prepare an absorption income statement for October (assume
the same number of units). Do not combine expenses but show each expense separately in the appropriate category.

Sales in Units 6,000


Income Statement

Sales Revenue $ 600,000.00


Cost of Goods Sold $ 385,000.00
Gross margin $ 215,000.00

Selling and Administrative Expenses:


Advertising Expense $ 14,000.00
Shipping Expense $ 30,000.00
Salaries and Commissions $ 102,000.00
Insurance Expense $ 6,000.00
Depreciation expense $ 15,000.00
Total selling and admisisrtative expens $ 167,000.00
Operating Income $ 48,000.00
4) Prepare a Contribution Margin Income Statement based on the October sales of 6,000 units (assume we produce and sel
number of units.) Do not combine expenses but show each expense separately in the appropriate category.

Sales in Units 6,000


Income Statement

Sales Revenue $ 600,000.00


Variable expense
Variable Cost of Goods sold $ 360,000.00
Variable operating expenses
Salaries and commissions $ 72,000.00
Shipping expenses $ 30,000.00
Total Variable expense $ 462,000.00

Contribution margin $ 138,000.00

Fixed Operating expenses


Advertising expense $ 14,000.00
Insurance Expense $ 6,000.00
Depreciation Expense $ 15,000.00
Fixed Salaries and commissions $ 30,000.00
Fixed Costs of Goods Sold $ 25,000.00
Total Fixed cost $ 90,000.00

Operating Income $ 48,000.00

5) Calculate the contribution margin per unit. Calculate the variable cost ratio.
Contribution margin per/unit $ 23.00
Variable Cost 77%

6) Calculate how many units would need to be sold to generate $75,000 in target income.
Round up to the nearest unit using the Excel Round Up function.
Target Income $ 75,000

Number of Units

7) Give one example of how Morrisey and Brown could increase projected operating income without increasing

Morrisey could have increased operating income by lowering their opporating cost. Two options would be to pay lower salaries
8) Morrisey and Brown are considering a multimedia advertising campaign that should increase sales by $
ad campaign will cost an additional $7,500 per month and will be considered a fixed cost. How will the ad
product cost? How will the increase in fixed costs affect the break-even point? Explain.

The product cost will increase by 7,500 per month because of the campaign. The break even point would be lower because the campaign w
They are having to pay for it.
t the total fixed costs per month for each month. For
h mixed cost per month.

elements. State the cost equation for each mixed

although you will not receive credit if the variable rate and fixed costs are
.

statement for October (assume we produce and sell


the appropriate category.
nits (assume we produce and sell the same
priate category.

ng income without increasing total sale revenue.

ns would be to pay lower salaries or to not pay as much for advertising


at should increase sales by $25,000 per month. The
a fixed cost. How will the ad campaign affect
? Explain.

ld be lower because the campaign will be bringing in more revenue than

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