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				September
Sales in units		6,750				7,250				7,750
Sales	$	742,500			$	797,500			$	852,500
Cost of goods sold		445,500				478,500				511,500
Gross margin		297,000				319,000				341,000
Selling and administrative expenses:
Advertising expense		33,800				33,800				33,800
Shipping expense		69,500				73,700				77,900
Salaries and commissions		125,000				132,100				139,200
Insurance expense		9,900				9,900				9,900
Depreciation expense		22,100				22,100				22,100
Total selling and administrative expenses		260,300				271,600				282,900
Net operating income	$	36,700			$	47,400			$	58,100

Required: #3 only please

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 7,750-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 commissions	Mixed
	Insurance expense	Fixed
	Depreciation expense	Fixed
2	Shipping expense	Y = $12,800 + $8.40 per unit
	Salaries and commissions	Y = $29,150 + $14.20 per unit
		Units	Shipping Expense	Salaries and Commissions
	High level of activity	7,750	$77,900	$139,200
	Low level of activity	6,750	$69,500	$125,000
	Change	1,000	$8,400	$14,200
	Variable-rate		$8.40	$14.20
	Fixed cost		$12,800	$29,150
3
	Sales		852,500
	Variable expenses:
	Cost of goods sold	511,500
	Shipping expense	65,100
	Salaries and commissions expense	110,050	686,650
	Contribution margin		165,850
	Fixed Expenses:
	Advertising expense	33,800
	Shipping expense	12,800
	Salaries and commissions	29,150
	Insurance expense	9,900
	Depreciation expense	22,100	107,750
	Net operating income		58,100