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		9,000				9,500				10,000
Sales	$	945,000			$	997,500			$	1,050,000
Cost of goods sold		567,000				598,500				630,000
Gross margin		378,000				399,000				420,000
Selling and administrative expenses:
Advertising expense		30,800				30,800				30,800
Shipping expense		130,000				136,000				142,000
Salaries and commissions		165,000				173,000				181,000
Insurance expense		10,950				10,950				10,950
Depreciation expense		17,300				17,300				17,300
Total selling and administrative expenses		354,050				368,050				382,050
Net operating income	$	23,950			$	30,950			$	37,950

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 10,000-unit level of activity using the contribution format.

Answer 1

Answer to Requirement 1:

Variable Costs:
Cost of Goods Sold

Fixed Costs:
Advertising Expense
Insurance Expense
Depreciation Expense

Mixed Costs:

Shipping Expense
Salaries and Commissions

Answer to Requirement 2:

Shipping Expense:

Variable Shipping Expense per unit = (Highest Shipping Expense - Lowest Shipping Expense) / (Highest Sales in units - Lowest Sales in units)
Variable Shipping Expense per unit = ($142,000 - $130,000) / (10,000 - 9,000)
Variable Shipping Expense per unit = $12.00

Fixed Shipping Expense = Highest Shipping Expense - Variable Shipping Expense per unit * Highest Sales in units
Fixed Shipping Expense = $142,000 - $12.00 * 10,000
Fixed Shipping Expense = $22,000

Shipping Expense = $22,000 + $12.00 * Sales in units

Salaries and Commissions:

Variable Salaries and Commissions per unit = (Highest Salaries and Commissions - Lowest Salaries and Commissions) / (Highest Sales in units - Lowest Sales in units)
Variable Salaries and Commissions per unit = ($181,000 - $165,000) / (10,000 - 9,000)
Variable Salaries and Commissions per unit = $16.00

Fixed Salaries and Commissions = Highest Salaries and Commissions - Variable Salaries and Commissions per unit * Highest Sales in units
Fixed Salaries and Commissions = $181,000 - $16.00 * 10,000
Fixed Salaries and Commissions = $21,000

Salaries and Commissions = $21,000 + $16.00 * Sales in units

Answer to Requirement 3: