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. References

Answer 1

1)

Variable cost remain constant in per unit whereas Fixed cost remain constant in totality .mixed cost is neither constant in per unit nor in totality .

cost	Output	Nature
cost of goods sold	240000/4000 or 270000/4500 or 300000/5000 = $ 60 per unit	variable
Advertising	21000 at each level of output	Fixed
shipping	34000/4000 = 8.5or36000/4500 = 8 neither constant in per unit nor in total	Mixed
salaries and commissiong	neither constant in per unit nor in total	Mixed
Insurance	6000at each level of output	Fixed
Depreciation	15000 at each level of output	Fixed

2)

	change in cost (Highest activity- lowest activity)	change in activity [Highest activity -lowest activity]	Variable costper unit	Fixed cost at highest activity level   [Total cost -variabe cost]
Shipping	38000 - 34000 = 4000	5000-4000= 1000	4000/1000 =$ 4 per unit	38000- [5000*4] 38000-20000 18000
salaries and commission	90000-78000= 12000	5000-4000=1000	12000/1000 =$ 12	90000-[5000*12] 90000-60000 30000

Shipping : 4x + 18000

salaries and commission : 12x +30000

3)Income statement ( contribution margin)

sales [5000*100]	500000
less:variable expense [76*5000]	(380000)
contribution margin	120000
lelss:Fixed cost	(90000)
net operating income	30000

**selling price = 400000/ 4000 = $ 100 per unit

Variable cost per unit = 60 + 4 shipping expense + 12 salaries and commission

           = 76

Fixed cost = 21000advertising + 18000 shipping + 30000 salaries and commission +6000insurance +15000 depreciation

   = 90000