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)	Expenses				Classification
	cost of goods sold				Variable
	Advertising expense				fixed
	shipping expense				mixed
	Salaries and commission				mixed
	insurance expense				fixed
	Depreciation expense				fixed
2)	High low method
	shipping expense
			units	cost
	high		5,000	38,000
	low		4,000	34,000
	difference		1,000	4,000
	variable expense per unit 4000/1000 = $4
	fixed expense = 38000-5000*4              = $18,000
	Salaries and commission
			units	cost
	high		5,000	90,000
	low		4,000	78,000
	difference		1,000	12,000
	Variable expense per unit = 12000/1000=$12
	fixed expense = 90000 - 5000*12   = $30,000
	cost formula
	shiiping expense                   Y   =   18000 + 4 per unit
	Salaries & commission        Y    = 30000+12per unit
3)	Sales in units				5000
	Sales				500,000
	Variable expense
	Cost of goods sold			300000
	Shipping expense			20,000
	Salaries and commission			60000
					380,000
	Contribution margin				120,000
	Fixed expense
	Advertising expense			21,000
	Shipping expense			18,000
	Salaries & commission			30,000
	insurance expense			6,000
	Depreciation expense			15,000
					90,000
	Net income				30,000