Problem no 2.

19
Answer: 1
Marwick’s Pianos, Inc.
Income Statement
For the month of August

Sales (40 pianos x $3,135 per piano) $125,000

Costs of goods sold (40 pianos x $2450 per piano) $98,000
Gross margin $27,000
Selling and administrative expenses:
Selling expenses:
Advertising $700
Sales salaries and commissions $10,950
Delivery of pianos (40 pianos x $30 per piano) $1,200
Utilities $350
Depreciation of Sales facility $800
Total selling expenses $14,000
Administrative Expenses:
Executive salaries $2,500
Insurance $400
Clerical $1,800
Depreciation of office equipment $300
Total administrative expense $5,000
Total selling and administrative expense $19,000
Net operating income $8,000
 Answer: 2

Marwick’s Pianos, Inc.

Income Statement
For the month of August

Total Per
Piano

Sales (40 pianos x $3,135 per piano) $125,000 $3,135

Variable Expenses:
Cost of Goods Sold
(40 pianos x $2,450 per piano) $98,000 $2,450
Sales Commission (8% * $125,000) $10,000 $250
Delivery of Pianos (40 pianos * $30 per piano) $1,200 $30
Clerical (40 pianos * $20 per piano) $800 $20
Total Variable Expenses $110,000 $2,750

Contribution Margin $15,000 $375

Fixed Expenses:
Advertising $700
Sales Salaries $950
Utilities $350
Depreciation of Sales Facility $800
Executive Salaries $2,500
Insurance $400
Clerical $1000
Depreciation of office equipment $300
Total Fixed expenses $7,000
 Net operating income $8,000

Answer: 3

Fixed cost remains constant in total but differs in a per unit value inversely with changes in the activity
level. When the activity level increases, , the fix cost will decrease on a per unit basis. Showing fix cost
on a per unit basis on the income statement might mislead the management into thinking that the fix
costs behave in the same way as the variable costs. That is, the 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.

Cost Classification:

Administrative
Variable of Selling Manufacturing Cost
Cost Item
Fixed Cost
Cost
  Direct Indirect
1 Factory Property Tax F       X
2 Boxes for packaging V     X  
3 Salesperson's Commission V X      
4 Factory Supervisor's Salary F       X
5 Depreciation on Executive Autos F   X    
6 Wages of Assembly line workers V     X  
7 Insurance on finished goods warehouses F X      
8 Lubricants for production equipment V       X
9 Advertising Cost F X      
10 Microchips for calculators V     X  
11 Shipping cost for merchandise sold V X      
12 Magazine Subscription, factory lunchroom F       X
13 Thread for use in Garment's factory V       X
14 Billing costs V X      
15 Life insurance of executive F   X    
16 Ink printing textbook V     X  
17 Fringe benefits of assembly line workers F       X
18 Yarn for sweaters V     X  
19 Wages of receptionist for executive office F   X    
 High-Low Method
  Number of Scan Utilities Cost
High activity level 150 4,000
Less: low activity level 60 2,200
Change 90 1,800

Change in Cost
Variable Cost per scan =
Change in Activity
= 1800 / 90
= 20

Total = 150 x $20

= 3000

Fixed Cost (FC) = Total Cost – Variable Cost

= $4000 - $3000
= $1000

Number of Scans X Utilities cost (in $) Y

0 500
20 1000
40 1500
60 2000
80 2500
100 3000
120 3500
140 4000
160 4500

Now, the cost formula for calculating utilities is, Y = a + bx

Where,
Y = Total mixed cost
a = Total fixed cost
b = Variable cost per scan
x = Level of activity

Question 1:
So, Y = a + bx
= $1000 + $20x
Question 2: the scatter graph showing the number of scan and utility cost is given below:

Utilities cost (in $) Y

5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
0 20 40 60 80 100 120 140 160

Question 3:

Assuming, total fixed cost, a = $1170.90

Variable cost per unit, b = $18.18

Y = 1170.90 + 18.18 X
Formula from High low method, Y = 1000 + 20 * X

The High low estimate of fixed costs is $117.9 which is lower than the estimate provided by least-square
regression. In addition, The High low estimate of the variable cost per machine hour which is $1.82
higher than the approximation provided by the least-squares regression. A straight line that decreases
the total sum of the square errors. This will intersect the Y-axis at $1170.90 instead of $1000 leading a
flatter slope as the estimated variable cost per unit is lower than the high-low method.