Question

Problem 5A-7 Cost Behavior; High-Low Method; Contribution Format Income Statement (LO5-10] 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: September 8,750 August 8,250 $ 825,000 495,000 330,000 $ 875,000 525,000 350,000 Morrisey & Brown, Ltd. Income Statements For the Three Months Ended September 30 July Sales in units 7,750 Sales $ 775,000 Cost of goods sold 465,000 Gross margin 310,000 Selling and administrative expenses: Advertising expense 28, 200 Shipping expense 89,500 Salaries and commissions 140,000 Insurance expense 7,200 Depreciation expense 21,600 Total selling and administrative expenses 286,500 Net operating income $ 23,500 28, 200 94,500 147,500 7,200 21,600 299,000 $ 31,000 28,200 99,500 155,000 7,200 21,600 311,500 $ 38,500 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 8,750-unit level of activity using the contribution format. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 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. (Round the Variable cost per unit to 1 decimal place.) Fixed Cost Formula Variable Cost per unit Shipping expense Salaries and commissions expense per unit A A :A X < Required 1 Required 3 >

Answer 1

1)	Expenses				Classification
	cost of goods sold				Variable
	Advertising expense				fixed
	shipping expense				mixed
	Salaries and commission				mixed
	insurance expense				fixed
	Depreciation expense				fixed
2)	High low method
	shipping expense
			units	cost
	high		8,750	99,500
	low		7,750	89,500
	difference		1,000	10,000
	variable expense per unit 10000/1000 = $10
	fixed expense =99500-8750*10=			12000
	Salaries and commission
			units	cost
	high		8,750	155,000
	low		7,750	140,000
	difference		1,000	15,000
	Variable expense per unit = 15000/1000=$15
	fixed expense = 155000-8750*15=				23750
	cost formula
			Variable cost		Fixed cost	Formula
	shipping expense		10	per unit	12,000	Y=	12,000	+	10	per unit
	Salaries & commission		15	per unit	23,750	Y=	23,750	+	15	per unit
3)	Sales in units				8750
	Sales				875,000
	Variable expense
	Cost of goods sold			525,000
	Shipping expense			87,500
	Salaries and commission			131250
					743,750
	Contribution margin				131,250
	Fixed expense
	Advertising expense			28,200
	Shipping expense			12,000
	Salaries & commission			23,750
	insurance expense			7,200
	Depreciation expense			21,600
					92,750
	Net income				38,500