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 Sales in units 4.000 4,500 Sales $ 400,000 $ 450,000 Cost of goods sold 240,000 270,000 Gross margin 160,000 180,000 Selling and administrative expenses: Advertising expense 21.000 21,000 Shipping expense 34,000 36.000 Salaries and commissions 78.000 84,000 Insurance expense 6,000 6,000 Depreciation expense 15,000 15,000 Total selling and administrative expenses 154,000 162,000 Net operating income $ 6,000 $ 18,000 September 5,000 $ 500,000 300,000 200,000 21,000 38,000 90.000 6,000 15,000 170,000 $ 30,000 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 Ya+bX 3. Redo the company's income statement at the 5,000-unit level of activity using the contribution format.

Answer 1

2.

Shipping expense:

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

Variable cost per unit = $4,000 / 1,000 = $4 per unit

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

Salaries and commission:

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

Variable cost per unit = $12,000 / 1,000 = $12 per unit

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

	Variable cost		Fixed cost	Formula
Shipping expense	$4	per unit	$18,000	Y =	$18,000	+	$4	X
Salaries and commission	$12	per unit	$30,000	Y =	$30,000	+	$12	X

3.

Morrisey & Brown, Ltd. Income Statement For The Month Ended September 30
Sales		$500,000
Variable expenses:
Cost of goods sold	$300,000
Shipping expense	20,000
Salaries and commission	60,000
Total variable expenses		(380,000)
Contribution margin		120,000
Fixed expenses:
Advertising expense	21,000
Shipping expense	18,000
Salaries and commission	30,000
Insurance expense	6,000
Depreciation expense	15,000
Total fixed expenses		(90,000)
Net operating income		$30,000