Question

Problem 5A-7 Cost Behavior; High-Low Method; Contribution Format Income Statement (L05-10] 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: August 5,500 $687,500 412,500 275,000 September 6,000 $750,000 450,000 300,000 Morrisey & Brown, Ltd. Income Statements For the Three Months Ended September 30 July Sales in units 5,000 Sales $625,000 Cost of goods sold 375,000 Gross margin 250,000 Selling and administrative expenses: Advertising expense 22,800 Shipping expense 46,000 Salaries and commissions 92,000 Insurance expense 6,050 Depreciation expense 24,700 Total selling and administrative expenses 191,550 Net operating income $ 58,450 22,800 48,800 98,400 6,050 24,700 200, 750 $ 74,250 22,800 51,600 104,800 6,050 24,700 209,950 $ 90,050 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 6,000-unit level of activity using the contribution format.

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		6,000	51,600
	low		5,000	46,000
	difference		1,000	5,600
	variable expense per unit 5600/1000 = $5.6
	fixed expense =51600-5000*5.6 =18000
	Salaries and commission
			units	cost
	high		6,000	104,800
	low		5,000	92,000
	difference		1,000	12,800
	Variable expense per unit = 12800/1000=$12.80
	fixed expense = 104800-6000*12.8 =28000
	cost formula
			Variable cost		Fixed cost	Formula
	shipping expense		5.6	per unit	18,000	Y=	18,000	+	5.6	per unit
	Salaries & commission		12.8	per unit	28,000	Y=	28,000	+	12.8	per unit
3)	Sales in units				6000
	Sales				750,000
	Variable expense
	Cost of goods sold			450,000
	Shipping expense			33,600
	Salaries and commission			76800
					560,400
	Contribution margin				189,600
	Fixed expense
	Advertising expense			22,800
	Shipping expense			18,000
	Salaries & commission			28,000
	insurance expense			6,050
	Depreciation expense			24,700
					99,550
	Net income				90,050