Question

Morrisey & Brown, Ltd., of Sydney is a merchandising company 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 Three Months Ended September 30
	July				August				September
Sales in units		7,500				8,000				8,500
Sales	$	712,500			$	760,000			$	807,500
Cost of goods sold		427,500				456,000				484,500
Gross margin		285,000				304,000				323,000
Selling and administrative expenses:
Advertising expense		39,600				39,600				39,600
Shipping expense		81,000				85,800				90,600
Salaries and commissions		135,000				142,400				149,800
Insurance expense		6,100				6,100				6,100
Depreciation expense		19,300				19,300				19,300
Total selling and administrative expenses		281,000				293,200				305,400
Net operating income	$	4,000			$	10,800			$	17,600

Required:

1. By analyzing the data from the company's income statements, classify each of its expenses (including cost of goods sold) as either variable, fixed, or mixed.

2. Using the high-low method, separate each mixed expense into variable and fixed elements. Express the variable and fixed portions of each mixed expense in the form Y = a + bX.

Answer 1

		July	Aug	Sep
	Sales in units	7,500	8,000	8,500
	Sales	7,12,500	7,60,000	8,07,500
	Cost of goods sold	4,27,500	4,56,000	4,84,500
	Gross margin	2,85,000	3,04,000	3,23,000
	Selling and administrative expenses:
	Advertising expense	39,600	39,600	39,600
	Shipping expense	81,000	85,800	90,600
	Salaries and commissions	1,35,000	1,42,400	1,49,800
	Insurance expense	6,100	6,100	6,100
	Depreciation expense	19,300	19,300	19,300
	Total selling and administrative expenses	2,81,000	2,93,200	3,05,400
	Net operating income	4,000	10,800	17,600
	Analysis on Each Expense:
	Cost of goods sold	427500	456000	484500
	Sales in units	7500	8000	8500
	PU Cost	57.00	57.00	57.00
	Result	Variable Cost
	Advertising expense	Fixed Cost	(Same at each level)
	Shipping expense	81000	85800	90600
	Sales in units	7500	8000	8500
	(Shipping Cost at 8000- at 7500)/	4800
	(Sales Units 8000- 7500)	500
	Per Unit Variable Cost	9.60
	At Sales Level(7500)	72000	(9.60*7500)	Variable Cost
	Total Cost	81000
	Fixed Cost	9000		Fixed Cost
	Variable Cost PU	9.60
	Fixed Cost	9000
	Salaries and commissions	135000	142400	149800
	Sales in units	7500	8000	8500
	(S&C Cost at 8000- at 7500)/	7400
	(Sales Units 8000- 7500)	500
	Per Unit Variable Cost	14.80
	At Sales Level(7500)	111000	(14.80*7500)	Variable Cost
	Total Cost	135000
	Fixed Cost	24000		Fixed Cost
	Variable Cost PU	14.80
	Fixed Cost	24000
	Insurance expense	Fixed Cost	(Same at each level)
	Depreciation expense	Fixed Cost	(Same at each level)
	Answer to First Part
1	Cost Element	Type
	Cost of goods sold	Variable Cost
	Advertising expense	Fixed Cost
	Shipping expense	Mixed	(Semi Variable Cost)
	Salaries and commissions	Mixed	(Semi Variable Cost)
	Insurance expense	Fixed Cost
	Depreciation expense	Fixed Cost
2	Use of High Low Method	Low Level	High Level
	Sales Level	7,500	8,500
	Total Cost at Each Level	7,08,500	7,89,900
	Change in Cost	81,400
	Change in Sale Level	1,000
	Variable Cost PU	81.40
	Total Variable Cost(7500*81.40)	6,10,500
	Total Cost	7,08,500
	Fixed Cost	98,000
	Y=98000+81.40X