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		4,000				4,500				5,000
Sales	$	400,000			$	450,000			$	500,000
Cost of goods sold		240,000				270,000				300,000
Gross margin		160,000				180,000				200,000
Selling and administrative expenses:
Advertising expense		21,000				21,000				21,000
Shipping expense		34,000				36,000				38,000
Salaries and commissions		78,000				84,000				90,000
Insurance expense		6,000				6,000				6,000
Depreciation expense		15,000				15,000				15,000
Total selling and administrative expenses		154,000				162,000				170,000
Net operating income	$	6,000			$	18,000			$	30,000

Required:  

1. Identify each of the company’s 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. State the cost formula for each mixed expense.

3. Redo the company’s income statement at the 5,000-unit level of activity using the contribution format.

Answer 1

1. Identify each of the company’s expenses (including cost of goods sold) as either variable, fixed, or mixed.

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

2. Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense.

Shipping expense :

Variable cost per unit = (38000-34000)/(5000-4000) = 4 per unit

Fixed cost = 38000-(5000*4) = $18000

Salaries and commission:

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

Fixed cost = 90000-(5000*12) = $30000

3. Redo the company’s income statement at the 5,000-unit level of activity using the contribution format.

Sales (5000*100)		500000
Less: Variable cost
Cost of goods sold (5000*60)	300000
Shipping expense (5000*4)	20000
Salaries and commission (5000*12)	60000
Total variable cost		380000
Contribution margin		120000
Less: Fixed cost
Advertising expense	21000
Shipping expense	18000
Salaries and commissions	30000
Insurance expense	6000
Depreciation expense	15000
Total fixed expense		90000
Net income (loss)		30000