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		5,100			4,600			5,720			5,200
Sales revenue	A$	510,000		A$	460,000		A$	572,000		A$	520,000
Less: Cost of goods sold		306,000			276,000			343,200			312,000
Gross margin		204,000			184,000			228,800			208,000
Less: Operating expenses:
Advertising expense		21,600			21,600			21,600			21,600
Shipping expense		36,400			38,400			42,880			38,280
Salaries and commissions		81,600			79,200			92,640			88,480
Insurance expense		6,600			6,600			6,600			6,600
Depreciation expense		15,600			15,600			15,600			15,600
Total operating expenses		161,800			161,400			179,320			170,560
Net income	A$	42,200		A$	22,600		A$	49,480		A$	37,440

(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.

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

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 5,720-unit level of activity using the contribution format.

MORRISEY & BROWN, LTD
Contribution Margin Projected 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 4,800 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