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 5,000 4,500 5,600 5,100 Sales revenue A$ 500,000 A$ 450,000 A$ 560,000 A$ 510,000 Less: Cost of goods sold 300,000 270,000 336,000 306,000 Gross margin 200,000 180,000 224,000 204,000 Less: Operating expenses: Advertising expense 21,500 21,500 21,500 21,500 Shipping expense 36,000 38,000 42,400 37,900 Salaries and commissions 81,000 79,000 92,200 87,900 Insurance expense 6,500 6,500 6,500 6,500 Depreciation expense 15,500 15,500 15,500 15,500 Total operating expenses 160,500 160,500 178,100 169,300 Net income A$ 39,500 A$ 19,500 A$ 45,900 A$ 34,700 (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.

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

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

3. Redo the company's income statement at the 5,600-unit level of activity using the contribution format.

4. Assume that the company’s sales are projected to be 4,750 units in the next quarter. Prepare a contribution margin income statement.

Answer 1

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