Q1) The Buffet Company produces and sells Parrot-head t-shirts.Income statements for two activity levels are provided below:
| | |
Unit Volumes | 40,000 | 60,000 |
| | |
Revenue | $300,000 | $450,000 |
Less cost of goods sold | 120,000 | 180,000 |
Gross margin | $180,000 | $270,000 |
Less operating expenses: | | |
Salaries and commissions | $40,000 | $ 50,000 |
Advertising expenses | $60,000 | $ 60,000 |
Administrative expenses | $25,000 | $ 25,000 |
Totaloperating expenses | $125,000 | $135,000 |
Net income | $55,000 | $ 135,000 |
| | |
Required:
- Identify the mixed expenses.
- Use the high-low method to separate the mixed costs intovariable and fixed components.
- Prepare a contribution margin income statement at the 50,000unit level.
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Q2) The Mean Cleaning Machine (MCM) Company and the AcmeCleaning Service provide janitorial services to commercial andresidential customers in a major metropolitan area. MCM pays itsemployees $10 per hour for commercial jobs and $12.50 per hour forresidential jobs. Acme pays its workers salaries. Acme’s totallabor costs run $200,000 per year. Both companies charge theircommercial customers an average of $15 per hour and the residentialcustomers $25 per hour.
Required:
- Prepare a contribution margin income statement for each companyassuming they provide 15,000 hours of service to commercialcustomers and 4,000 hours of service to residential customersduring the period and incurred no other expenses than thosementioned above.
- A new service has recently entered the market specializing inresidential cleaning at substantial lower rates. Both MCM and Aceare contemplating getting out of the residential business. Preparea contribution margin income statement for each company assumingthey do exit the residential business.
- Which company will fare better if the residential business iseliminated? Why?
