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. By analyzing the data from the company's income statements, classify each of its 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. Express the variable and fixed portions of each mixed expense in the form Y = a + bX.

3. Redo the company’s income statement at the 10,000-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 9,000 9,500 10,000 Sales $ 945,000 $ 997,500 $ 1,050,000 Cost of goods sold 567,000 598,500 630,000 Gross margin 378,000 399,000 420,000 Selling and administrative expenses: Advertising expense 30,800 30,800 30,800 Shipping expense 130,000 136,000 142,000 Salaries and commissions 165,000 173,000 181,000 Insurance expense 10,950 10,950 10,950 Depreciation expense 17,300 17,300 17,300 Total selling and administrative expenses 354,050 368,050 382,050 Net operating income $ 23,950 $ 30,950 $ 37,950

Explanation / Answer

1.

2.

Working:

Working:

3.

Totals Per unit Fixed/ July August September July August September Variable/ Mixed Sales in units 9000 9500 10000 Sales Revenue 945000 997500 1050000 105.00 105.00 105.00 Cost of goods sold 567000 598500 630000 63.00 63.00 63.00 Variable Gross margin 378000 399000 420000 42.00 42.00 42.00 Selling and administrative expenses: Advertising expense 30800 30800 30800 3.42 3.24 3.08 Fixed Shipping expense 130000 136000 142000 14.44 14.32 14.20 Mixed Salaries and commisions 165000 173000 181000 18.33 18.21 18.10 Mixed Insurance expense 10950 10950 10950 1.22 1.15 1.10 Fixed Depreciation expense 17300 17300 17300 1.92 1.82 1.73 Fixed Total selling and administrative expense 354050 368050 382050 39.34 38.74 38.21 Net operating income 23950 30950 37950 2.66 3.26 3.80 a.From the above analysis, we can say that cost of goods sold is a variable cost as the per unit cost is the same at all     levels of sales units. b. We also can conclude that advertising, insurance and depreciation expenses are fixed expenses as the total amount      is constant at all levels of activity (sales). c. Shipping and salaries and commission expenses are mixed, as the cost per unit is varying and the total amounts are     also varying at different levels of activity. We need to bifurcate these costs into fixed and variable components.    This wll be done using the high-low methd as shown below.

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