Question - Gallop Corporation prepared the following report for the first quarter of 2015:
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Sale (2,500 units @ $2,800 per unit)
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$7,000,000
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Less: Cost of goods sold
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3,840,000
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Gross margin
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3,160,000
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Less:
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Selling expenses
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$1,024,000
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Administrative expenses
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1,000,000
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2,024,000
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Income
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$1,136,000
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Gallop's controller, Nancy Johnstone, studied the costs in detail, particularly focusing on cost behaviour.
Her analysis revealed the following:
- Sixty-five percent of the cost of goods sold was variable With respect to the number of units
- Of the selling expenses, $800,000 was fixed, the remaining was variable with respect to the number of units.
- All of the administrative expenses were fixed
Required:
1. Express the cost of goods sold and the selling expenses in terms of cost equations.
2. Redo the above income statement using a contribution margin approach.