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 Sales in units 4,000 Sales $ 400,000 Cost of goods sold 240,000 Gross margin 160,000 Selling and administrative expenses: Advertising expense 21,000 Shipping expense 34,000 Salaries and commissions 78,000 Insurance expense 6,000 Depreciation expense 15,000 Total selling and administrative expenses 154,000 Net operating income $ 6,000 August 4,500 $ 450,000 270,000 180,000 September 5,000 $ 500,000 300,000 200,000 21,000 36,000 84,000 6,000 15,000 162,000 $ 18,000 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 Y = a + bx. 3. Redo the company's income statement at the 5,000-unit level of activity using the contribution format.

Answer 1

ANSWER1

EXPENSES	CLASSIFICATION
Cost of Goods Sold	Variable
Advertising Expense	Fixed
Shipping Expense	Mixed
Salaries and Commission	Mixed
Depreciation expense	Fixed
Insurance Expense	Fixed

ANSWER2

High Low Method

Salaries and Commission

	UNITS	COST
High	5,000	$90,000
Low	4,000	$78,000
Difference	1,000	$12,000

Variable Expense Per Unit= Difference Cost / Difference in Units

=$12,000/1,000

=$12

Fixed Expense=Total Cost - Units* Variable Cost

=$90,000-5000*$12

=$90,000-$60,000

=$30,000

Shipping Expense

	UNITS	COST
High	5,000	$38,000
Low	4,000	$34,000
Difference	1,000	$4,000

Variable Expense Per Unit= Difference Cost / Difference in Units

=$4,000/1,000

=$4

Fixed Expense=Total Cost - Units* Variable Cost

=$38,000-5000*$4

=$38,000-$20,000

=$18,000

Cost Formula

	VARIABLE COST	FIXED COST
Shipping Expense	$4 per unit	$18,000
Salaries & Commission	$12 per unit	$30,000

Formula

Shipping Expense	Y=$18,000+$4X
Salaries & Commission	Y=$30,000+$12X

ANSWER3, using Contribution Format

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 Expenses	$21,000
Shipping Expense	$18,000
Salaries and Commission	$30,000
Insurance Expense	$6,000
Depreciation Expense	$15,000
Total Fixed Expense		($90,000)
Net Operating Income		$30,000

hope you got the answer,

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