Question

Morrisey & Brown, Ltd., of Sydney, Australia, is a merchandising firm 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 Four Quarters Ending December 31
	Quarter 1			Quarter 2			Quarter 3			Quarter 4
Sales in units		5,700			5,200			6,440			5,800
Sales revenue	A$	570,000		A$	520,000		A$	644,000		A$	580,000
Less: Cost of goods sold		342,000			312,000			386,400			348,000
Gross margin		228,000			208,000			257,600			232,000
Less: Operating expenses:
Advertising expense		22,200			22,200			22,200			22,200
Shipping expense		38,800			40,800			45,760			40,560
Salaries and commissions		85,200			80,400			95,280			91,960
Insurance expense		7,200			7,200			7,200			7,200
Depreciation expense		16,200			16,200			16,200			16,200
Total operating expenses		169,600			166,800			186,640			178,120
Net income	A$	58,400		A$	41,200		A$	70,960		A$	53,880

(Note: Morrisey & Brown, Ltd.’s Australian-formatted income statement has been recast into the format common in Canada. The Australian dollar is denoted by A$.)

Required:

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

	Expenses Classification Cost of goods sold Advertising expense Shipping expense Salaries and commissions Insurance expense Depreciation expense

2-a. Using the high-low method, separate each mixed expense into variable and fixed elements.

	Variable Cost Fixed Cost ???????????? A$ ??????? per unit A$ ???? ???????????? A$ ??????? per unit A$ ???? ???????????? A$ ??????? per unit A$ ????

2-b. Using the high-low method, state the cost formula for each mixed expense.

	?????? Y= A$ ?????? + A$ ???? X ???? Y= A$ ??? + A$ ??? X ??? Y= A$ ???? + A$ ???? X

3. Redo the company's income statement at the 6,440-unit level of activity using the contribution format.

	MORRISEY & BROWN, LTD. Contribution Margin Income Statement For the Quarter Ended September 30 Sales in units A$ Less: Variable expenses: A$ 0 0 Less: Fixed expenses:       0 A$ 0

4. Assume that the company’s sales are projected to be 5,100 units in the next quarter. Prepare a contribution margin income statement.

	MORRISEY & BROWN, LTD. Contribution Margin Projected Income Statement For the Quarter Ended March 31 Sales in units A$ Less: Variable expenses:    A$ 0 0 Less: Fixed expenses: 0 A$ 0

Answer 1

	Quarter 1	Quarter 2	Quarter 3	Quarter 4
Sales in units	5,700	5,200	6,440	5,800
Sales revenue	5,70,000	5,20,000	6,44,000	5,80,000
Less: Cost of goods sold	3,42,000	3,12,000	3,86,400	3,48,000
Gross margin	2,28,000	2,08,000	2,57,600	2,32,000
Less: Operating expenses:
Advertising expense	22,200	22,200	22,200	22,200
Shipping expense	38,800	40,800	45,760	40,560
Salaries and commissions	85,200	80,400	95,280	91,960
Insurance expense	7,200	7,200	7,200	7,200
Depreciation expense	16,200	16,200	16,200	16,200
Total operating expenses	1,69,600	1,66,800	1,86,640	1,78,120
Net income	58,400	41,200	70,960	53,880

Expenses	Classification
Cost of goods sold	Variable
Advertising expense	Fixed
Shipping expense	Mixed
Salaries and commissions	Mixed
Insurance expense	Fixed
Depreciation expense	Fixed

	Quarter 1	Quarter 2	Quarter 3	Quarter 4
Sales in units	5,700	5,200	6,440	5,800
Salaries and commissions	85,200	80,400	95,280	91,960
Highest -lowest cost			14,880
Change in units			1,240
Variable costs			12
Varible cost		62400	77280
Fixed costs		18,000	18,000

	Quarter 1	Quarter 2	Quarter 3	Quarter 4
Sales in units	5,700	5,200	6,440	5,800
Shipping expense	38,800	40,800	45,760	40,560
High-low cost difference			4,960
Units difference			1,240
Variable cost per unit			4.00
Varibel costs		20800	25760
Fixed costs		20,000	20,000

Cost formula
High activity
Salaries and commissions	=Total fixed costs+(variable cost*units)
	=18000+(12*6440)
	95280
Shipping expense	=Total fixed costs+(variable cost*units)
	=20000+(6440*4)
	45760
Lowest activity
Salaries and commissions	=Total fixed costs+(variable cost*units)
	=18000+(12*5200)
	80400
Shipping expense	=Total fixed costs+(variable cost*units)
	=20000+(5200*4)
	40800

Sales in units	6,440
Sales revenue	6,44,000
Less: Cost of goods sold	3,86,400
Gross margin	2,57,600
Less: variable shipping expense	25,760
Less: variable Salaries and commissions	77,280
Contribution margin	1,54,560
Less: Fixed expenses
Advertising expense	22,200
Shipping expense Fixed	18,000
Salaries and commissions Fixed	20,000
Insurance expense	7,200
Depreciation expense	16,200
Total operating expenses	83,600
Net income	70,960

Sales in units	5,100
Sales revenue	5,10,000
Less: Cost of goods sold	3,06,000
Gross margin	2,04,000
Less: variable shipping expense	20,400
Less: variable Salaries and commissions	61,200
Contribution margin	1,22,400
Less: Fixed expenses
Advertising expense	22,200
Shipping expense Fixed	18,000
Salaries and commissions Fixed	20,000
Insurance expense	7,200
Depreciation expense	16,200
Total operating expenses	83,600
Net income	38,800