Arnall Ltd., a British merchandising company, is the exclusive distributor of a

Question

Arnall Ltd., a British merchandising company, is the exclusive distributor of a product that is gaining rapid market acceptance. The company's revenues and expenses (in British pounds) for the last three months are given below: Arnall Ltd Comparative Income Statements For the Three Months Ended June 30 April May June Sales in units 2,300 5,800 7,000 £ 368,000 172,500 £928,000 £1,120,000 525,000 Sales revenue 435,000 Cost of goods sold Gross margin Selling and administrative expenses: 195,500 493,000 595,000 Shipping expense Advertising expense Salaries and commissions Insurance expense Depreciation expense 43,400 40,000 137,500 6,100 41,600 81,900 40,000 295,000 6,100 41,600 95,100 40,000 349,000 6,100 41,600 Total selling and administrative expenses 268,600 464,600 531,800 Net operating income (loss) £ (73,100) £ 28,400 E 63,200 (Note: Arnall Ltd.'s income statement has been recast in the functional format common in the United States The British currency is the pound, denoted by £.)

Explanation / Answer

Part- 1

Notes-

1. Cost of goods sold is 75 pounds per unit(172500/2300), therefore, it is variable with the no. of units sold.

2. Shipping expenses are mixed expenses. The variable and fixed elements are as under-

variable expenses = (95100-43400)/(7000-2300) = 11 pounds per unit

fixed expenses = 95100-(11 pounds*7000 units) = 18100 pounds

3. Advertising expenses are same in all three activity levels. Therefore, these are fixed expenses.

4. Salaries and commission are mixed expenses. The variable and fixed elements are as under-

variable expenses = (349000-137500)/(7000-2300) = 45 pounds per unit

fixed expenses = 349000-(45 pounds*7000 units) = 34000 pounds

5. Insurance expenses are same in all three activity levels. Therefore, these are fixed expenses.

6. Depreciation expenses are same in all three activity levels. Therefore, these are fixed expenses.

Part- 2

34000 pounds

Part-3

Income Statement at 7000 units level

Expenses Classification Cost of goods sold (Note 1) Variable Shipping Expenses (Note 2) Mixed Advertising Expenses (Note 3) Fixed Salaries and Commission (Note 4) Mixed Insurance Expenses (Note 5) Fixed Depreciation Expenses (Note 6) Fixed

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