Morrisey & Brown, Ltd., of Sydney is a merchandising company that is the sole di

Question

Morrisey & Brown, Ltd., of Sydney is a merchandising company that is the sole distributor of a product that is increasing in popularity among Australian consumers. The company’s income statements for the three most recent months follow:

Required:  

1. Identify each of the company’s expenses (including cost of goods sold) as either variable, fixed, or mixed.

2. Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense.

3. Redo the company’s income statement at the 5,000-unit level of activity using the contribution format.

Morrisey & Brown, Ltd.
Income Statements
For the Three Months Ended September 30 July August September Sales in units 4,000 4,500 5,000 Sales $ 400,000 $ 450,000 $ 500,000 Cost of goods sold 240,000 270,000 300,000 Gross margin 160,000 180,000 200,000 Selling and administrative expenses: Advertising expense 21,000 21,000 21,000 Shipping expense 34,000 36,000 38,000 Salaries and commissions 78,000 84,000 90,000 Insurance expense 6,000 6,000 6,000 Depreciation expense 15,000 15,000 15,000 Total selling and administrative expenses 154,000 162,000 170,000 Net operating income $ 6,000 $ 18,000 $ 30,000

Explanation / Answer

1. Identify each of the company’s expenses (including cost of goods sold) as either variable, fixed, or mixed.

2. Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense.

Shipping expense :

Variable cost per unit = (38000-34000)/(5000-4000) = 4 per unit

Fixed cost = 38000-(5000*4) = $18000

Salaries and commission:

Variable cost per unit = (90000-78000)/(5000-4000) = 12 per unit

Fixed cost = 90000-(5000*12) = $30000

3. Redo the company’s income statement at the 5,000-unit level of activity using the contribution format.

Cost of goods sold Variable Advertising expense Fixed Shipping expense Mixed Salaries and commission Mixed Insurance expense Fixed Depreciation expense Fixed

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