Cost Classifications and Cost Behavior

(with solution and explanation)

Problem #1

Macy Company, a British Merchandising Firm, is the exclusive distributor of a product that is gaining rapid market acceptance. The company's revenues and expenses for the last three months are given below:

MACY COMPANY

Comparative Income Statement

For The Last Three Months Ended June 30

April May June

Sales in units 3,000 3,750 4,500

Sales revenue P420,000 P525,000 P630,000

Less cost of good sold 168,000 210,000 252,000

Gross Margin 252,000 315,000 378,000

Less Operating Expenses:

Shipping Expense 44,000 50,000 56,000

Advertising Expense 70,000 70,000 70,000

Salaries and commissions 107,000 125,000 143,000

Insurance Expense 9,000 9,000 9,000

Depreciation Expense 42,000 42,000 42,000

Total Operating Expenses 272,000 296,000 320,000

Net income (loss) P(20,000) P19,000 P58,000

Required:

1. Identify each of the company's expenses (including cost of goods sold) as being either variable, fixed, or mixed.
2. By use high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense.
3. Redo the company's income statement at the 4,500-unit level of activity using the contribution format.