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 5,000 $ 550,000 330,000 220,000 Morrisey & Brown, Ltd. Income Statements For the Three Months Ended September 30 July Sales in units 4,500 Sales $ 495,000 Cost of goods sold 297,000 Gross margin 198,000 Selling and administrative expenses: Advertising expense 30,600 Shipping expense 35,000 Salaries and commissions 80,000 Insurance expense 9,950 Depreciation expense 21,800 Total selling and administrative expenses 177,350 Net operating income $ 20,650 30,600 37,400 86,200 9,950 21,800 185,950 $ 34,050 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 5,500-unit level of activity using the contribution format.

Answer 1

Answer with working notes is given below

| 1 July 4,500 $297,000 Units Cost of Goods sold Per unit Comments August 5,000 $330,000 $66 Variable $66 Since per unit is same Advertising expense $30,600 $30,600 Fixed Amount is Constant $37,400 Mixed Per unit varies Shipping expense Per unit (Cost / Units) $35,000 $7.78 $7.48 Salaries and commission Per unit (Cost / Units) $80,000 $17.78 $86,200 $17.24 Mixed Per unit varies Insurance expense $9,950 $9,950 Fixed Amount is Constant Depreciation expense $21,800 $21,800 Fixed Amount is Constant 2 High-Low method Shipping expense Units Shipping expense Variable expense per unit July 4,500 $35,000 August Difference 5,000 500A $37,400 $2,400 B $4.80 B/A Variable expense Fixed Expense $21,600 $13,400 $24,000 (Units X $4.80) $13,400 Total expense - Variable expense Y= a + bx Y= $13,400 + $4.80X Salaries and commission Units Salaries and commission Variable expense per unit July 4,500 $80,000 August Difference | 5,000 500A $86,200 $6,200B $12.40 B/A Variable expense Fixed Expense $55,800 $24,200 $62,000 (Units X $12.40) $24,200 Total expense - Variable expense Y= a + bx Y= $24,200 + $12.40X 3 Sales Income Statement at 5,500 unit level of activity $605,000 (5,500 * $110) Less: Variable cost Cost of Goods sold $363,000 (5,500 * $66) Shipping expense $26,400 (5,500 * $4.80) Salaries and Commission $68,200 (5,500 * $12.40) Total Variable cost $457,600 Contribution $147,400 Less: Fixed Cost Advertising expense $30,600 Shipping expense $13,400 Salaries and wages $24,200 Insurance expense $9,950 Depreciation expense $21,800 Total Fixed cost $99,950 Net Operating Income $47,450 Working notes: Selling price per unit Total Sales Units $550,000 5,000 5 $110