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$.)

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

2a)			Variable cost		Fixed cost
	Shpping expense		4	per unit	20,000
	Salaries and commission		12	per unit	18,000
2b)	Cost formula
	Shipping expense		Y=	20,000	+	4	X
	salaries and commission		Y=	18,000	+	12	X

3)	Sales in units				6440
	Sales				644,000
	Variable expense
	Cost of goods sold			386,400
	Shipping expense			25,760
	Salaries and commission			77280
					489,440
	Contribution margin				154,560
	Fixed expense
	Advertising expense			22,200
	Shipping expense			20,000
	Salaries & commission			18,000
	insurance expense			7,200
	Depreciation expense			16,200
					83,600
	Net income				70,960

4)	Sales in units				5100
	Sales				510,000
	Variable expense
	Cost of goods sold			306,000
	Shipping expense			20,400
	Salaries and commission			61200
					387,600
	Contribution margin				122,400
	Fixed expense
	Advertising expense			22,200
	Shipping expense			20,000
	Salaries & commission			18,000
	insurance expense			7,200
	Depreciation expense			16,200
					83,600
	Net income				38,800