Question

MORRISEY & BROWN, LTD. Income Statements
For the Four Quarters Ending December 31
	Quarter 1			Quarter 2			Quarter 3			Quarter 4
Sales in units		4,700			4,200			5,240			4,800
Sales revenue	A$	470,000		A$	420,000		A$	524,000		A$	480,000
Less: Cost of goods sold		282,000			252,000			314,400			288,000
Gross margin		188,000			168,000			209,600			192,000
Less: Operating expenses:
Advertising expense		21,200			21,200			21,200			21,200
Shipping expense		34,800			36,800			40,960			36,760
Salaries and commissions		79,200			78,400			90,880			86,160
Insurance expense		6,200			6,200			6,200			6,200
Depreciation expense		15,200			15,200			15,200			15,200
Total operating expenses		156,600			157,800			174,440			165,520
Net income	A$	31,400		A$	10,200		A$	35,160		A$	26,480

(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 5,240-unit level of activity using the contribution format.

4. Assume that the company’s sales are projected to be 4,600 units in the next quarter. Prepare a contribution margin income statement.

Answer 1

Please refer the following image for the solution: