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Parker Company manufactures and sells a single product.
Required:
1. A partially completed schedule of the company's total and per unit costs over a relevant range of
52,000 to 92,000 units produced and sold each year is given below. Complete the schedule of the
company's total and unit costs. (Round the "Cost per unit" to 2 decimal places. Omit the "$" sign
in your response.)

52,000

Units Produced and Sold

72,000

92,000

Total costs:
Variable costs
Fixed costs

$ 140,400
460,000

$ n/r
n/r

$ n/r
n/r

Total costs

$ 600,400

$ n/r

$ n/r

Cost per unit:

Variable cost
Fixed cost

$ n/r
n/r

$ n/r
n/r

$ n/r
n/r

Total cost per unit

$ n/r

$ n/r

$ n/r

2. Assume that the company produces and sells 82,000 units during the year at the selling price of
$10.09 per unit. Prepare a contribution format income statement for the year. (Input all amounts as
positive values except losses which should be indicated by a minus sign. Omit the "$" sign in
your response.)
Parker Company
Contribution Format Income Statement
n/r
n/r

$ n/r
n/r

n/r
n/r

n/r
n/r

n/r

$ n/r

Learning Objective: 02-03 Understand cost behavior

patterns including variable costs, fixed costs, and mixed
costs.

Worksheet

Learning Objective: 02-05 Prepare income statements for

a merchandising company using the traditional and
contribution formats.

Parker Company manufactures and sells a single product.

Required:
1. A partially completed schedule of the company's total and per unit costs over a relevant range of
52,000 to 92,000 units produced and sold each year is given below. Complete the schedule of the
company's total and unit costs. (Round the "Cost per unit" to 2 decimal places. Omit the "$" sign
in your response.)

52,000
Total costs:
Variable costs

$ 140,400

Fixed costs

$ 600,400

Fixed cost
Total cost per unit

2.70

8.85
$

11.55

194,400

92,000
$

460,000

460,000

Total costs
Cost per unit:
Variable cost

Units Produced and Sold

72,000

654,400

2.70

460,000
$

6.39
$

9.09

248,400

708,400

2.70
5.00

7.70

2. Assume that the company produces and sells 82,000 units during the year at the selling price of
$10.09 per unit. Prepare a contribution format income statement for the year. (Input all amounts as
positive values except losses which should be indicated by a minus sign. Omit the "$" sign in
your response.)

Sales

Parker Company
Contribution Format Income Statement
$ 827,380

Variable expenses

221,400

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Contribution margin

605,980

Fixed expenses

460,000

Net operating income

145,980

Explanation:
1.

The company's variable cost per unit would be:

$140,400
= $2.70 per unit.
52,000 units
2.

Sales (82,000 units $10.09 per unit) = $827,380

Variable expenses (82,000 units $2.70 per unit) = $221,400

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Speedy Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by
the companys cost analyst has determined that if a truck is driven 165,000 miles during a year, the
average operating cost is 12.9 cents per mile. If a truck is driven only 110,000 miles during a year, the
average operating cost increases to 16.2 cents per mile.
Required:
1. Using the high-low method, estimate the variable and fixed cost elements of the annual cost of truck
operation. (Round the "Variable cost per mile" to 3 decimal places and the "Fixed cost" to the
nearest dollar amount. Omit the "$" sign in your response.)

$ n/r
$ n/r

Variable cost
Fixed cost

per mile
per year

2. Express the variable and fixed costs in the form Y = a + bX. (Round the "Variable cost per mile" to
3 decimal places and the "Fixed cost" to the nearest dollar amount. Omit the "$" sign in your
response.)
Y =

$ n/r

$ n/r

3. If a truck were driven 137,000 miles during a year, what total cost would you expect to be incurred?
(Round the "Variable cost per mile" to 3 decimal places. Round your intermediate and final
answers to the nearest dollar amount. Omit the "$" sign in your response.)
Total annual cost

$ n/r

Learning Objective: 02-03 Understand cost behavior

patterns including variable costs, fixed costs, and mixed
costs.

Worksheet

Learning Objective: 02-04 Analyze a mixed cost using a

scattergraph plot and the highlow method.

Speedy Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by
the companys cost analyst has determined that if a truck is driven 165,000 miles during a year, the
average operating cost is 12.9 cents per mile. If a truck is driven only 110,000 miles during a year, the
average operating cost increases to 16.2 cents per mile.
Required:
1. Using the high-low method, estimate the variable and fixed cost elements of the annual cost of truck
operation. (Round the "Variable cost per mile" to 3 decimal places and the "Fixed cost" to the
nearest dollar amount. Omit the "$" sign in your response.)

Variable cost

.063 per mile

Fixed cost

10,890 per year

2. Express the variable and fixed costs in the form Y = a + bX. (Round the "Variable cost per mile" to
3 decimal places and the "Fixed cost" to the nearest dollar amount. Omit the "$" sign in your
response.)
Y =

10,890 +

.063 X

3. If a truck were driven 137,000 miles during a year, what total cost would you expect to be incurred?
(Round the "Variable cost per mile" to 3 decimal places. Round your intermediate and final
answers to the nearest dollar amount. Omit the "$" sign in your response.)
Total annual cost

19,521

Explanation:
1.

High level of activity

Low level of activity
Change

Miles
Driven
165,000
110,000

Total Annual
Cost*
$21,285
17,820

55,000

$ 3,465

* 165,000 miles $.129 per mile = $21,285

110,000 miles $.162 per mile = $17,820
Variable cost per mile:
Change in cost
Change in activity

$3,465
55,000 miles

= $.063 per mile

Fixed cost per year:

Total cost at 165,000 miles

$21,285

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Less variable cost element: 165,000 miles $.063 per mile

Fixed cost per year

10,395
$ 10,890

3.

Fixed cost
Variable cost: 137,000 miles $.063 per mile
Total annual cost

$ 10,890
8,631
$19,521

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Frankel Ltd., a British merchandising company, is the exclusive distributor of a product that is gaining
rapid market acceptance. The companys revenues and expenses (in British pounds) for the last three
months are given below:

Sales in units

Frankel Ltd.
Comparative Income Statements
For the Three Months Ended June 30
April
1,600

Sales revenue
Cost of goods sold

May
3,200

June
4,800

283,200
113,600

566,400
227,200

849,600
340,800

169,600

339,200

508,800

41,500
69,800
98,100
9,200
41,100

62,300
69,800
162,100
9,200
41,100

83,100
69,800
226,100
9,200
41,100

259,700

344,500

429,300

(90,100)

(5,300)

79,500

Gross margin
Selling and administrative expenses:
Shipping expense
Advertising expense
Salaries and commissions
Insurance expense
Depreciation expense
Total selling and administrative expenses
Net operating income (loss)

(Note: Frankel Ltd.s income statement has been recast in the functional format common in the United
States. The British currency is the pound, denoted by .)
Required:
1. Identify each of the companys expenses (including cost of goods sold) as either variable, fixed, or
mixed.
Expenses
Cost of goods sold
Shipping expense
Advertising expense
Salaries and commissions
Insurance expense
Depreciation expense

Classification
n/r
n/r
n/r
n/r
n/r
n/r

2. Using the high-low method, separate each mixed expense into variable and fixed elements. State the
cost formula for each mixed expense. (Omit the "" sign in your response.)
Variable Cost
n/r
per unit
n/r
per unit

n/r
n/r

Fixed Cost
n/r
n/r

Formula
Y = n/r
+
Y = n/r
+

n/r
n/r

X
X

3. Redo the companys income statement at the 4,800-unit level of activity using the contribution format.
(Input all amounts as positive values except losses which should be indicated by a minus
sign. Omit the "" sign in your response.)
Frankel Ltd.
Income Statement
For the Month Ended June 30
n/r
Variable expenses:
n/r

n/r

n/r
n/r
Contribution margin
Fixed expenses:
n/r

n/r
n/r

n/r
n/r
n/r
n/r
n/r

n/r
n/r

Worksheet

Learning Objective: 02-04 Analyze a mixed cost using a

scattergraph plot and the highlow method.

Learning Objective: 02-03 Understand cost behavior

patterns including variable costs, fixed costs, and mixed
costs.

Learning Objective: 02-05 Prepare income statements for

a merchandising company using the traditional and
contribution formats.

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Frankel Ltd., a British merchandising company, is the exclusive distributor of a product that is gaining
rapid market acceptance. The companys revenues and expenses (in British pounds) for the last three
months are given below:

Sales in units

Frankel Ltd.
Comparative Income Statements
For the Three Months Ended June 30
April
1,600

Sales revenue
Cost of goods sold
Gross margin
Selling and administrative expenses:
Shipping expense
Advertising expense
Salaries and commissions
Insurance expense
Depreciation expense
Total selling and administrative expenses
Net operating income (loss)

May
3,200

June
4,800

283,200
113,600

566,400
227,200

849,600
340,800

169,600

339,200

508,800

41,500
69,800
98,100
9,200
41,100

62,300
69,800
162,100
9,200
41,100

83,100
69,800
226,100
9,200
41,100

259,700

344,500

429,300

(90,100)

(5,300)

79,500

(Note: Frankel Ltd.s income statement has been recast in the functional format common in the United
States. The British currency is the pound, denoted by .)
Required:
1. Identify each of the companys expenses (including cost of goods sold) as either variable, fixed, or
mixed.
Expenses
Cost of goods sold
Shipping expense
Advertising expense
Salaries and commissions
Insurance expense
Depreciation expense

Classification
Variable
Mixed
Fixed
Mixed
Fixed
Fixed

2. Using the high-low method, separate each mixed expense into variable and fixed elements. State the
cost formula for each mixed expense. (Omit the "" sign in your response.)

Shipping expense

Variable Cost
13 per unit

Salaries and commissions

40 per unit

Fixed Cost

20,700

Y=

Formula
20,700 +

13 X

Y=

34,100

40 X

34,100

3. Redo the companys income statement at the 4,800-unit level of activity using the contribution format.
(Input all amounts as positive values except losses which should be indicated by a minus
sign. Omit the "" sign in your response.)
Frankel Ltd.
Income Statement
For the Month Ended June 30
Sales revenue
Variable expenses:
Cost of goods sold

849,600

340,800
62,400

Shipping expense
Sales commissions

192,000

595,200
254,400

Contribution margin
Fixed expenses:
Shipping expense

20,700

Advertising expense

69,800

Sales salaries

34,100
9,200

Insurance expense
Depreciation expense

41,100

Net operating income

174,900

79,500

Explanation:
2.

Analysis of the mixed expenses:

High level of activity

Low level of activity

Units
4,800
1,600

Shipping
Expense
83,100
41,500

Salaries and
Commissions
226,100
98,100

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Change

3,200

41,600

128,000

Variable cost element:

Variable cost per unit =

Shipping expense: =

Change in cost
Change in activity

41,600
= 13 per unit
3,200 units

Salaries and commissions:

128,000
3,200 units

= 40 per unit

Fixed cost element:

Cost at high level of activity

Less variable cost element:
4,800 units 13 per unit
4,800 units 40 per unit
Fixed cost element

Shipping
Expense
83,100

Salaries and
Commissions
226,100

62,400
192,000
20,700

34,100

The cost formulas are:

Shipping expense: 20,700 per month plus 13 per unit or
Y = 20,700 + 13X.
Salaries and Commissions: 34,100 per month plus 40 per unit or
Y = 34,100 + 40X.
3.

Cost of goods sold: (4,800 units 71 per unit) = 340,800

Shipping expense: (4,800 units 13 per unit) = 62,400
Sales commissions: (4,800 units 40 per unit) = 192,000

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Alden Company has decided to use a contribution format income statement for internal planning
purposes. The company has analyzed its expenses and has developed the following cost formulas:
Cost
Cost of goods sold
Advertising expense
Sales commissions
Administrative salaries
Shipping expense
Depreciation expense

Cost Formula
$26 per unit sold
$176,000 per quarter
8% of sales
$86,000 per quarter
?
$56,000 per quarter

Management has concluded that shipping expense is a mixed cost, containing both variable and fixed
cost elements. Units sold and the related shipping expense over the last eight quarters are given below:

Quarter
Year 1:
First
Second
Third
Fourth
Year 2:
First
Second
Third
Fourth

Units Sold

Shipping
Expense

22,000
24,000
29,000
25,000

$166,000
$181,000
$223,000
$186,000

23,000
26,000
34,000
31,000

$176,000
$191,000
$238,000
$214,000

Management would like a cost formula derived for shipping expense so that a budgeted contribution
format income statement can be prepared for the next quarter.
Required:
1. Using the high-low method, estimate a cost formula for shipping expense based on the data for the
last eight quarters above. (Omit the "$" sign in your response.)
Y = $ n/r

+ $ n/r

2. In the first quarter of Year 3, the company plans to sell 27,000 units at a selling price of $56 per unit.
Prepare a contribution format income statement for the quarter. (Input all amounts as positive
values except losses which should be indicated by a minus sign. Omit the "$" sign in your
response.)
Alden Company
Budgeted Income Statement
For the First Quarter of Year 3
n/r
Variable expenses:
n/r

$ n/r
$

n/r
n/r
Total variable expenses

n/r

n/r
Fixed expenses:
n/r

n/r

n/r
n/r
n/r
Total fixed expenses

n/r

n/r

$ n/r

Learning Objective: 02-04 Analyze a mixed cost using a

scattergraph plot and the highlow method.

Worksheet

Learning Objective: 02-05 Prepare income statements for

a merchandising company using the traditional and
contribution formats.

Alden Company has decided to use a contribution format income statement for internal planning
purposes. The company has analyzed its expenses and has developed the following cost formulas:
Cost
Cost of goods sold
Advertising expense
Sales commissions
Administrative salaries
Shipping expense
Depreciation expense

Cost Formula
$26 per unit sold
$176,000 per quarter
8% of sales
$86,000 per quarter
?
$56,000 per quarter

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Management has concluded that shipping expense is a mixed cost, containing both variable and fixed
cost elements. Units sold and the related shipping expense over the last eight quarters are given below:

Quarter
Year 1:
First
Second
Third
Fourth
Year 2:
First
Second
Third
Fourth

Units Sold

Shipping
Expense

22,000
24,000
29,000
25,000

$166,000
$181,000
$223,000
$186,000

23,000
26,000
34,000
31,000

$176,000
$191,000
$238,000
$214,000

Management would like a cost formula derived for shipping expense so that a budgeted contribution
format income statement can be prepared for the next quarter.
Required:
1. Using the high-low method, estimate a cost formula for shipping expense based on the data for the
last eight quarters above. (Omit the "$" sign in your response.)
Y=$

34,000 + $

6 X

2. In the first quarter of Year 3, the company plans to sell 27,000 units at a selling price of $56 per unit.
Prepare a contribution format income statement for the quarter. (Input all amounts as positive
values except losses which should be indicated by a minus sign. Omit the "$" sign in your
response.)
Alden Company
Budgeted Income Statement
For the First Quarter of Year 3
Sales
Variable expenses:
Cost of goods sold

1,512,000

$ 702,000

Shipping expense

162,000

Sales commissions

120,960

Total variable expenses

984,960

Contribution margin
Fixed expenses:
Shipping expense

527,040
34,000
176,000

Advertising expense
Administrative salaries

86,000

Depreciation expense

56,000
352,000

Total fixed expenses

Net operating income

175,040

Explanation:
1.
High-low method:

High activity level

Low activity level

Units Sold
34,000
22,000

Shipping
Expense
$ 238,000
166,000

12,000

$ 72,000

Change

Variable cost per unit

Change in cost
Change in activity
$72,000
= $6 per unit
12,000 units

Fixed cost element:

Total shipping expense at high activity level

Less variable element:
34,000 units $6.00 per unit

$ 238,000

Fixed cost element

$ 34,000

204,000

Therefore, the cost formula is: Y = $34,000 + $6X.

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2.

Sales: (27,000 units $56 per unit) = $1,512,000

Cost of goods sold: (27,000 units $26 per unit) = $702,000
Shipping expense: (27,000 units $6 per unit) = $162,000
Sales commission: ($1,512,000 .08) = $120,960

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