Question

ble utilities cost per ton mined and the 1 . Express these estimates in the form Y = a + bx Would you recommend that the company use tons mined or direct lao planning utilities cost? les cost per ton mined and the total fixed utili or direct labor hours as a base for PROBLEM SA-7 Cost Behavior High-Low Method: Contribution Format Incontre Morrisey & Brown. Ltd. of Sydney is a merchandising company that is a product that is increasing in popularity among Australian consu statements for the three most recent months follow: ng in popularity among Australian consumers. The company Format Income Statement L05-10 company that is the sole distributor of Morrisey & Brown, Ltd. Income Statements For the Three Months Ended September 30 July 4,000 $400,000 240,000 160,000 August 4,500 $450,000 270,000 180,000 September 5,000 $500,000 300,000 200,000 Sales in units .... Sales. Cost of goods sold ...... Gross margin ................... Selling and administrative expenses: Advertising expense...... Shipping expense.... Salaries and commissions... Insurance expense.............. Depreciation expense ..... . Total selling and administrative expenses Net operating income........... 21.000 34,000 78,000 6,000 21.000 36,000 84,000 6,000 15,000 162,000 $ 18,000 21.000 38.000 90,000 6,000 15,000 170,000 $ 30,000 15.000 154,000 $ 6,000 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 5,000-unit level of activity using the contribu tion format.

Answer 1

1.

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

2.

Shipping expense:

Variable cost per unit = $38,000-34,000 / 5,000-4,000 = $4 per unit

Fixed cost = $38,000 - 20,000 (5,000*$4) = $18,000

Y = $18,000 + $4X

Salaries and commission:

Variable cost per unit = $90,000-78,000 / 5,000-4,000 = $12 per unit

Fixed cost = $90,000-60,000 (5,000*$12) = $30,000

Y = $30,000 + $12X

3.

Morrisey & Brown Ltd Income Statement
Sales		$500,000
Variable costs:
Cost of goods sold	$300,000
Shipping expense (5,000*$4)	20,000
Salaries and commission (5,000*$12)	60,000
Total variable costs		(380,000)
Contribution margin		120,000
Fixed costs:
Advertising expense	21,000
Shipping expense	18,000
Salaries and commission	30,000
Insurance expense	6,000
Depreciation expense	15,000
Total fixed costs		(90,000)
Net operating income		$30,000