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: August 7,500 $ 787,500 472,500 315,000 September 8,000 $ 840,000 504,000 336,000 Morrisey & Brown, Ltd. Income Statements For the Three Months Ended September 30 July Sales in units 7,000 Sales $ 735,000 Cost of goods sold 441,000 Gross margin 294,000 Selling and administrative expenses : Advertising expense 36,400 Shipping expense 75,000 Salaries and commissions 120,000 Insurance expense 8,400 Depreciation expense 22,800 Total selling and administrative expenses 262,600 Net operating income $ 31,400 36,400 79,400 127,200 8,400 22,800 274,200 $ 40,800 36,400 83,800 134,400 8,400 22,800 285,800 $ 50, 200 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 8,000-unit level of activity using the contribution format.

Answer 1

There are three types of costs (1) variable (2) fixed (3) mixed

variable cost changes with change in units of output.Cost per unit is same.

Fixed cost in total remains same at all levels of output.

Mixed cost are both variable as well as fixed.

	7000	7500	8000	Type of cost
Cost of goods sold	$63 [441,000/7000]	$63[$472,500/7500]	$63[504000/8000]	Variable	As the cost per unit remained same at all level of output, the cost is variable
Advertising	36,400	36400	36400	Fixed cost	As the total cost are same , the cost is fixed cost
shipping	$10.71[75000/7000]	$10.59[79,400/7500]	$10.475[83,800/8000]	mixed cost	neither cost in total nor per unit cost is same, so the cost are mixed cost
salaries and commission	$17.14[120,000/7000]	$16.96[127,200/7500]	$16.8[134,400/8000]	Mixed cost
Insurance	$8,400	$8,400	$8,400	fixed cost
depreciation	$22,800	$22,800	$22,800	fixed cost

2. we will break down mixed costs into fixed and variable cost

Y = a+bx

Shipping expense,salaries and commission are mixed cost

shipping :

High	$83,800	8000 units
Low	$75,000	7000 units
Change	$8,800[83,800-75,000]	1000 units

variable cost = change in cost/change in units

=$8,800/1000

Variable cost=$8.8 per unit

Y = a+bx

Y = total cost

a= fixed cost

b= variable cost per unit

X= number of units

$83,800 = Fixed cost + $8.8*8000units

Fixed cost =$13,400

Y = $13,400+$8.8X

Salaries and commission:

High	$134,400	8000 units
Low	$120,000	7000 units
Change	$14,400[134,400-120,000]	1000 units

variable cost = change in cost/change in units

=$14,400/1000

Variable cost=$14.4 per unit

Y = a+bx

Y = total cost

a= fixed cost

b= variable cost per unit

X= number of units

$134,400 = Fixed cost + $14.4*8000units

Fixed cost =$19,200

Y = $19,200+$14.4X

3.Contribution margin format statement for 8000 units

	8000 units
Sales	$840,000
Less:Variable expense
Cost of goods sold	$504,000
Shipping expense	$70,400	[$8.8*8000]
salaries and commission	$115,200	[$14.4*8000 units]
Contribution margin	$150,400	[840,000-504,000-70,400-115,200]
Less: Fixed expenses
Advertising expense	$36,400
shipping expense	$13,400
salaries and commission	$19,200
insurance expense	$8,400
depreciation expense	$22,800
Net operating income	$50,200	[150,400-36,400-13,400-19,200-8,400-22,800]