Question

An income statement for Sam's Bookstore for the first quarter of the year is presented below:

Sam's Bookstore
Income Statement
For Quarter Ended March 31
Sales			$	880,000
Cost of goods sold				550,000
Gross margin				330,000
Selling and administrative expenses
Selling	$	117,000
Administration		138,000		255,000
Net operating income			$	75,000

On average, a book sells for $55. Variable selling expenses are $5 per book with the remaining selling expenses being fixed. The variable administrative expenses are 4% of sales with the remainder being fixed.

The cost formula for selling and administrative expenses with "X" equal to the number of books sold is:

Answer 1

Y = $139,800 + $7.20X

Explanation:

Unit sales = $880,000 ÷ $55 per book = 16,000 books

Selling expenses = Fixed selling expenses + ($5 per book x 16,000 books)

$117,000 = Fixed selling expenses + $80,000

Fixed selling expenses = $117,000 − $80,000 = $37,000

Administrative expenses = Fixed administrative expenses + (0.04 x $880,000)

$138,000 = Fixed administrative expenses + $35,200

Fixed administrative expenses = $138,000 − $35,200 = $102,800

Variable administrative expense per unit = 0.04 x $55 per book = $2.20 per book

Y= ($37,000 + $102,800) + ($5 + $2.20) X

Y = $139,800 + $7.20X, where "X" equal to the number of books sold.