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:

Morrisey & Brown, Ltd. Income Statements For the Three Months Ended September 30
	July				August				September
Sales in units		5,250				5,750				6,250
Sales	$	630,000			$	690,000			$	750,000
Cost of goods sold		378,000				414,000				450,000
Gross margin		252,000				276,000				300,000
Selling and administrative expenses:
Advertising expense		30,600				30,600				30,600
Shipping expense		46,500				49,500				52,500
Salaries and commissions		93,000				99,500				106,000
Insurance expense		10,200				10,200				10,200
Depreciation expense		21,300				21,300				21,300
Total selling and administrative expenses		201,600				211,100				220,600
Net operating income	$	50,400			$	64,900			$	79,400

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 6,250-unit level of activity using the contribution format.

Answer 1

1.

Cost Type	Cost Behavior
Cost of Goods Sold	Variable Cost at $72 per unit
Advertising Expense	Fixed Cost
Shipping Expense	Mixed Cost
Salaries and Commissions	Mixed Cost
Insurance Expense	Fixed
Depreciation Expense	Fixed

2) Shipping Expense:

Variable Cost = (52,500 - 46,500) / (6250 - 5250) = $6per unit

Fixed Cost = 52500 - (6250 x 6) = $15,000

Cost formula for Shipping Expense: Y = 15,000 + 6X

Salaries and Commissions:

Variable Cost = (106,000 - 93,000) / (6250 - 5250) = $13per unit

Fixed Cost = 106,000 - (6250 x 13) = $24,750

Cost formula for Salaries and Commissions: Y = 24,750 + 13X

3.

Sales Revenue	7,50,000
less Variable Costs
Cost of goods sold	4,50,000 (6250 x 72)
Variable Shipping Expense	37,500(6250 x 6)
Variable Salaries and Commissions	81,250 (6250 x 13)
Contribution Margin	1,81,250
less Fixed Costs
Advertising Expense	30,600
Fixed Shipping Expense	15,000
Fixed Salaries and Commissions	24,750
Insurance Expense	10,200
Depreciation Expense	21,300
Net Operating Income	79400