Exercise 3-8

1.

High activity level (July)................

Low activity level (March) .............
Change .......................................

Custodial
Guest- Supplies
Days
Expense
12,000 $13,500
4,000
7,500
8,000
$ 6,000

Variable cost element:

Fixed cost element:

Custodial supplies expense at high activity
level .................................................................
Less variable cost element:
12,000 guest-days $0.75 per guestday ..................................................................
Total fixed
cost ..................................................................

$13,500
9,000
$4,500

The cost formula is $4,500 per month plus $0.75 per guest-day or
Y = $4,500 + $0.75X
2. Custodial supplies expense for 11,000 guest-days:
Variable cost:
11,000 guest-days $0.75 per guestday .........................................................
Fixed
cost .........................................................
Total
cost .........................................................

$ 8,250
4,500
$12,750

Problem 3-11
1.

Marwicks Pianos, Inc.

Income Statement
For the Month of August
Sales (40 pianos $3,125 per
piano) .........................................................
Cost of goods sold
(40 pianos $2,450 per
piano) .........................................................
Gross
margin ........................................................
Selling and administrative expenses:
Selling expenses:
Advertising ...............................................
Sales salaries and commissions
[$950 + (8%
$125,000)] .............................................
Delivery of pianos
(40 pianos $30 per
piano) ....................................................
Utilities .....................................................
Depreciation of sales
facilities .................................................
Total selling
expenses ..................................................
Administrative expenses:
Executive
salaries ..................................................
Insurance .................................................
Clerical
[$1,000 + (40 pianos $20 per
piano)]...................................................
Depreciation of office
equipment .............................................
Total administrative
expenses ..................................................

$125,000
98,000
27,000

700

10,950
1,200
350
800
14,000

2,500
400
1,800
300
5,000

Total selling and administrative

expenses .....................................................
Net operating
income ........................................................

2.

19,000
$8,000

Marwicks Pianos, Inc.

Income Statement
For the Month of August

Sales (40 pianos $3,125 per

piano) ............................................................
Variable expenses:
Cost of goods sold
(40 pianos $2,450 per
piano)..........................................................
Sales commissions (8%
$125,000) ....................................................
Delivery of pianos (40 pianos $30 per
piano)..........................................................
Clerical (40 pianos $20 per
piano)..........................................................
Total variable
expenses ........................................................
Contribution
margin ...........................................................
Fixed expenses:
Advertising .....................................................
Sales
salaries ........................................................
Utilities ...........................................................
Depreciation of sales
facilities .......................................................
Executive
salaries ........................................................
Insurance .......................................................

Total

Per
Piano

$125,000

$3,125

98,000

2,450

10,000

250

1,200

30

800

20

110,000

2,750

15,000

$ 375

700
950
350
800
2,500
400

Clerical ...........................................................
Depreciation of office
equipment ...................................................
Total fixed
expenses ........................................................
Net operating
income ...........................................................

1,000
300
7,000
$ 8,000

3. Fixed costs remain constant in total but vary on a per unit basis
inversely with changes in the activity level. As the activity level
increases, for example, the fixed costs will decrease on a per unit basis.
Showing fixed costs on a per unit basis on the income statement might
mislead management into thinking that the fixed costs behave in the
same way as the variable costs. That is, management might be misled
into thinking that the per unit fixed costs would be the same regardless
of how many pianos were sold during the month. For this reason, fixed
costs generally are shown only in totals on a contribution format income
statement.

Problem 3-12
1.
Cost of goods sold ...................................

Variable

Advertising expense ................................

Fixed

Shipping expense .....................................

Mixed

Salaries and commissions ........................

Mixed

Insurance expense ....................................

Fixed

Depreciation expense...............................

Fixed

2.
MORRISEY & BROWN, LTD.
Analysis of Expenses
Cost of goods sold
Advertising expense
Shipping expense
Salaries and commissions
Insurance expense
Depreciation expense

240000
21000
21000
78000
6000
15000

Analysis of the mixed expenses:

High level of activity

Low level of activity
Change

Variable cost element:

Shipping expense
Salaries and commission expense

Fixed cost element:

Cost at high level of activity
Less variable cost element

The cost formulas are:

Shipping expense
Salaries and commission expense

Units
5,000
4,000
1,000
Correct!

Shipping
Expense
38,000
34,000
4,000
Correct!

Change
in Cost
4,000
12,000

Change
in Activity
1,000
1,000

Shipping
Expense
38,000
20,000
18,000
Correct!

Salaries &
Comm. Exp.
90,000
60,000
30,000
Correct!

y=18000+4x
y=30000+12x

Salaries &
Comm. Exp.
90,000
78,000
12,000
Correct!
Variable
Rate
4
12

<--Correct!
<--Correct!

3.
MORRISEY & BROWN, LTD.
Income Statement
For the Month Ended September 30
Sales in units
Sales revenue
Variable expenses:
Cost of goods sold
Shipping expense
Salaries & comm. expense
Contribution margin
Fixed expenses:
Advertising expense
Shipping expense
Salaries and commissions exp.
Insurance expense
Depreciation expense
Net operating income

5,000
500,000
300,000
20,000
60,000

380,000
120,000

21,000
18,000
30,000
6,000
15,000

90,000
30,000
Correct!