Question

Redo the company's income statement at the 5,000-unit level of activity using the contribution format. Morrisey & Brown, Ltd. Income Statement For the Month Ended September 30 Variable expenses: Fixed expenses:

Answer 1

1.

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

2. High low metho equation;

Variable cost per unit =

( Highest activity cost - lowest activity cost)/( highest activity units - lowest activity units)

Analysing shipping expense variable cost per unit is not constant and it is slightly decreasing .So it is a mixed cost. Taking into consideration sales of July and August ;

Highest shipping expense = $ 38000 @ sales level of 5000 units

Lowest shipping expense = $ 34000 @ sales level of 4000 units

Therefore variable cost per unit = (38000- 34000)/ (5000-4000)

=$ 4 per unit

Total variable cost at sales of 5000 units = 5000× 4= 20000

Therefore fixed shipping cost= 38000- 20000= $ 18000

Expressing it an equation,

Y= $18000+ 4X (Y= a+bX)

Y- total expense , X - number of units

Analysing salaries & sales commissions;

Highest activity cost = $ 90000 @ sales level of 5000 units

Lowest activity cost = $ 78000 at sales level of 4000 units

Variable cost per unit = (90000-78000)/(5000-4000)= $ 12 per unit

Total variable cost at sale of 5000 units = 12 × 5000= $ 60000

Therefore fixed salaries and commission= 90000-60000=

$ 30000

expressing it in a equation ,

Y = $ 30000+ 12X

3. Morrisey and brown Ltd.

Income statement for the month ended September 30

( contribution income statement at activity level of 5000 units)

Particulars	Per unit($)	Total ($)
Sales	100	500000 (5000×100)
Less : variable expenses
Cost of goods sold	60	300000
Shipping expense	4	20000 ( 5000×4)
Salaries and commission	12	60000
total variable cost		380000
Contribution		120000 ( 500000-380000)
Less: Fixed expenses;
Advertising expense		21000

Insurance expense		6000
Depreciation expense		15000
Shipping expense		18000
Salaries and commission		30000
Total fixed expense	(21000+6000+15000+ 18000+30000)	90000
Net operating Income	(120000-90000)	30000

Selling price per unit= total sales/ units= 400000/4000=$ 100

Cost of goods sold per unit = total cost/ units = 240000/4000= $ 60