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		5,200			4,700			5,840			5,300
Sales revenue	A$	520,000		A$	470,000		A$	584,000		A$	530,000
Less: Cost of goods sold		312,000			282,000			350,400			318,000
Gross margin		208,000			188,000			233,600			212,000
Less: Operating expenses:
Advertising expense		21,700			21,700			21,700			21,700
Shipping expense		36,800			38,800			43,360			38,660
Salaries and commissions		82,200			79,400			93,080			89,060
Insurance expense		6,700			6,700			6,700			6,700
Depreciation expense		15,700			15,700			15,700			15,700
Total operating expenses		163,100			162,300			180,540			171,820
Net income	A$	44,900		A$	25,700		A$	53,060		A$	40,180

(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 5,840-unit level of activity using the contribution format.

4. Assume that the company’s sales are projected to be 4,850 units in the next quarter. Prepare a contribution margin income statement.

Answer 1

Working Note: Morrisey & Bromn - to comppute Vriable ost per Unit and Fixed Cost and identify nature of cost
	Q-1	Q-2	Q-3	Q-4	Nature of cost
	Total	Per Unit	Total	Per Unit	Total	Per Unit	Total	Per Unit
Sales Units	5,200		4,700		5,840		5,300
Sales	$520,000.00	$100.00	$470,000.00	$100.00	$584,000.00	$100.00	$530,000.00	$100.00	Variable
Less: Cost Of Goods Sold	$312,000.00	$60.00	$282,000.00	$60.00	$350,400.00	$60.00	$318,000.00	$60.00	variable
Gross Margin	$208,000.00		$188,000.00		$233,600.00		$212,000.00
Less: Selling And Administrative Expenses
Advertisment	$21,700.00		$21,700.00		$21,700.00		$21,700.00		Fixed
Shipping Expenses	$36,800.00	$7.08	$38,800.00	$8.26	$43,360.00	$7.42	$38,660.00	$7.29	Mixed
Salaries And Commissions	$82,200.00	$15.81	$79,400.00	$16.89	$93,080.00	$15.94	$89,060.00	$16.80	Mixed
Insurance Expenses	$6,700.00		$6,700.00		$6,700.00		$6,700.00		Fixed
Depreciation Expenses	$15,700.00		$15,700.00		$15,700.00		$15,700.00		Fixed
Total	$163,100.00		$162,300.00		$180,540.00		$171,820.00
Net Operating Income	$44,900.00		$25,700.00		$53,060.00		$40,180.00

Part-a: Classification of Expense
Cost Of Goods Sold	Variable
Advertisement Expenses	Fixed
Shipping Expenses	Mixed
Salaries And Commission	Mixed
Insurance Expenses	Fixed
Depreciation Expenses	Fixed

Part-b
	Variable cost	FiXed Cost	formula
Shipping Expenses	$4	Per Unit	20000	Y=	$20,000	+	$4	Per Unit
Salaries And Commission	$12	Per Unit	$23,000	Y=	$24,000	+	$12	Per Unit

Working Note : Use High Low Method

Variable cost per Unit = ( Cost at Higher Activity Level- Cost at Lower activity Level)/ ( Higher Activity Level- Lower Activity Level)

Shipping Expense

Variable cost per Unit =(43360-38800)/(5840-4700)= $4 per Unit

Fixed Cost = Total Cost for 5840 Unit - Variable cost for 5840 Unit

=43360-(5840*4)=20000

Salaries & Comm Expense

Variable cost per Unit =(93080-79400)/(5840-4700)= $12 per Unit

Fixed Cost = Total Cost for 5840 Unit - Variable cost for 5840 Unit

=93080-(5840*12)=23000

Part-3 Income Statement at 5840Activity Level
Sales		$584,000.00
Less: Variable Expense
Cost Of Goods Sold	$350,400.00
Shipping Cost	$23,360.00
Salarieis & Commission Expense	$70,080.00	$443,840.00
Contribution		$140,160.00
Less: Fixed Cost
Advertisment	$21,700.00
Shipping Expenses	$20,000.00
Salaries And Commissions	$23,000.00
Insurance Expenses	$6,700.00
Depreciation Expenses	$15,700.00	$87,100.00
Net Operating Income		$53,060.00

Part-4 Income Statement at 4850Activity Level
Sales		$485,000.00
Less: Variable Expense
Cost Of Goods Sold	$291,000.00
Shipping Cost	$19,400.00
Salarieis & Commission Expense	$58,200.00	$368,600.00
Contribution		$116,400.00
Less: Fixed Cost
Advertisment	$21,700.00
Shipping Expenses	$20,000.00
Salaries And Commissions	$23,000.00
Insurance Expenses	$6,700.00
Depreciation Expenses	$15,700.00	$87,100.00
Net Operating Income		$29,300.00