Chapters 6 & 7 - Cost Behavior, High-Low Method, Contribution Margin Income Statement, and Break-Even Analysis

Please do not just give the answers! I would like the problems worked out in order to understand them.

Edwards & Shaw is a merchandising company that is the sole distributor of a product that is increasing in popularity. The companys income statement for the three most recent months is listed below.

Edwards and Shaw

Income Statement

For the Three Months Ending September

	July	August	September
Sales in Units	3,000	6,000	7,500
Sales Revenue	$900,000	$1,800,000	$2,250,000
Cost of Goods Sold	255,000	480,000	592,500
Gross Margin	645,000	1,320,000	1,657,500
Operating Expenses:
Advertising Expense	8,500	8,500	8,500
Shipping Expense	16,500	33,000	41,250
Salaries and Commissions	72,000	99,000	112,500
Legal Expense	5,000	5,000	5,000
Depreciation Expense	12,000	12,000	12,000
Total Operating Expenses	114,000	157,500	179,250
Operating Income	$531,000	$1,162,500	$1,478,250

1.) Identify each of the companys individual expenses (both product and period) as either a variable, fixed or mixed cost.

2.) Using the high-low method, separate each of the individual mixed cost into the variable rate and fixed cost elements. State the cost equation for each individual mixed costs.

3.) Edwards and Shaw expect to sell 8,000 units in October. Prepare an absorption income statement for October.

4.) Prepare a Contribution Margin Income Statement based on October sales of 8,000 units. Do not combine expenses but show each expense separately in the appropriate category.

5.) Calculate the contribution margin per unit and the variable cost ratio.

6.) How many units would need to be sold to generate $2,000,000 in target income? (Round your answer to the nearest unit using the Excel Round Up function.)

7.) Give one example of how Edwards and Shaw could increase projected operating income without increasing total sales revenue.

8.) Edwards and Shaw are considering a multimedia advertising campaign that should increase sales by $50,000 per month. The ad campaign will cost an additional $1,500 per month and will be considered a fixed cost. How will the ad campaign affect product cost? How will the increase in fixed costs affect the break-even point? Explain

1) Identify each of the company's expenses as either variable, fixed, or mixed. For the FC list the total fixed costs per month for each month. For VC list the variable cost per unit for each month. For MC list the total average cost per unit for each mixed cost per month.
		July	August	September
Fixed Costs
Variable Costs
Mixed Costs
2) Using the high-low method, separate each of the mixed expenses into variable and fixed elements. State the cost equation for each mixed cost. You may have more than one mixed cost.
Variable Rate
Fixed Cost
Cost Formula
3. Edwards and Shaw expect to sell 8,000 units in October. Prepare an absorption income statement for October (assume we produce and sell the same number of units).
Sales in Units		8,000
Sales Revenue
Operating Income
4) Prepare a Contribution Margin Income Statement based on the October sales of 8,000 units (assume we produce and sell the same number of units.) Do not combine expenses but show each expense separately in the appropriate category.
Sales in Units		8,000
Sales Revenue
Operating Income
5) Calculate the contribution margin per unit. Calculate the variable cost ratio.
6) Calculate how many units would need to be sold to generate $2,000,000 in target income.
Round up to the nearest unit using the Excel Round Up function.
Target Income	$2,000,000

7) Give one example of how Edwards and Shaw could increase projected operating income without increasing total sale revenue

8) Edwards and Shaw are considering a multimedia advertising campaign that should increase sales by $50,000 per month. The ad campaign will cost an additional $1,500 per month and will be considered a fixed cost. How will the ad campaign affect product cost? How will the increase in fixed costs affect the break-even point? Explain.