Question

Problem 5A-7 Cost Behavior; High-Low Method; Contribution Format Income Statement [LO5-10]

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		5,500				6,000				6,500
Sales	$	577,500			$	630,000			$	682,500
Cost of goods sold		346,500				378,000				409,500
Gross margin		231,000				252,000				273,000
Selling and administrative expenses:
Advertising expense		24,200				24,200				24,200
Shipping expense		57,000				60,200				63,400
Salaries and commissions		104,000				110,600				117,200
Insurance expense		9,200				9,200				9,200
Depreciation expense		19,600				19,600				19,600
Total selling and administrative expenses		214,000				223,800				233,600
Net operating income	$	17,000			$	28,200			$	39,400

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 6,500-unit level of activity using the contribution format.

Answer 1

1.

Cost	Cost Behavior
Cost of Goods Sold	Variable
Advertising Expense	Fixed
Shipping Expense	Mixed
Salaries and Commissions	Mixed
Insurance Expense	Fixed
Depreciation Expense	Fixed

2.

	Shipping Expense	Salaries and Commission
High	$ 63,400	$ 117,200
Low	57,000	104,000
Difference in Cost	$ 6,400	$ 13,200
Difference in Sales Volume	1,000 units	1,000 units
Variable Cost per Unit	$ 6.40 per unit	$ 13.20 per unit
Fixed Cost per month	$ 21,800	$ 31,400

3.

Morrissey and Brown Ltd.
Contribution Margin Income Statement
Activity Level : 6,500 units
Sales Revenue ( 6,500 x $ 105)		$ 682,500
Less Variable Costs:
Cost of Goods Sold ( 6,500 x $ 63)	409,500
Shipping Expense ( 6,500 x $ 6.40)	41,600
Salaries and Commissions ( 6,500 x $ 13.20)	85,800	536,900
Contribution Margin		$ 145,600
Less: Fixed Cost
Advertising	24,200
Insurance	9,200
Shipping	21,800
Salaries and Commissions	31,400
Depreciation	19,600
Total Fixed Costs		106,200
Net Operating Income		$ 39,400