Maryland Novelties Company produces and sells souvenir products. Monthly income statements for two activity levels are provided below: Unit volumes20,000 units 30,000 unitsRevenue $150,000 $225,000 Less cost of goods sold 60,000 90,000 Gross margin $90,000 $135,000 Less operating expenses Salaries and commissions 20,000 25,000 Advertising expenses 30,000 30,000 Administrative expenses 12,500 12,500 Total operating expenses 62,500 67,500 Net income $27,500 $67,500 Required: 1) Identify the mixed expense(s).2) Use the high-low method to separate the mixed costs into variable and fixed components.3) Prepare a contribution margin income statement at the
20,000-unit level.
What will be an ideal response?
1) The salaries and commissions cost is mixed.
2) The variable cost per unit: ($25,000 - $20,000) ÷ (30,000 - 20,000) = $0.50 per unit
The total fixed cost = $25,000 - (30,000 × $0.50) = $10,000
3) Contribution margin income statement:
| Unit volume | 20,000 units | ||||
| Revenue | $ | 150,000 | |||
| Less variable costs | |||||
| Cost of goods sold | 60,000 | ||||
| Salaries and commissions | 10,000 | ||||
| Total variable costs | $ | 70,000 | |||
| Contribution margin | $ | 80,000 | |||
| Less fixed costs | |||||
| Salaries and commissions | 10,000 | ||||
| Advertising expense | 30,000 | ||||
| Administrative expense | 12,500 | ||||
| Total fixed costs | $ | 52,500 | |||
| Net income | $ | 27,500 | |||
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