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 4,000 4,500 5,000 Sales $400,000 $450,000 $500,000 Cost of goods sold 240,000 270,000 300,000 Gross margin 160,000 180,000 200,000 Selling and administrative expenses: Advertising expense 21,000 21,000 21,000 Shipping expense 34,000 36,000 38,000 Salaries and commissions 78,000 84,000 90,000 Insurance expense 6,000 6,000 6,000 Depreciation expense 15,000 15,000 15,000 Total selling and administrative expenses 154,000 162,000 170,000 Net operating income $ 6,000 $ 18,000 $ 30,000 Required: 1. Identify each of the company’s 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. State the cost formula for each mixed expense. 3. Redo the company’s income statement at the 5,000-unit level of activity using the contribution format. Explanation: 2. Analysis of the mixed expenses: Units Shipping Expense Salaries and Commissions Expense High level of activity 5,000 $38,000 $90,000 Low level of activity 4,000 34,000 78,000 Change 1,000 $4,000 $12,000 Variable cost element: Variable rate = Change in cost Change in activity Shipping expense: $4,000 = $4 per unit 1,000 units Salaries and commissions expense: = $12,000 = $12 per unit 1,000 units Fixed cost element: Shipping Expense Salaries and Commissions Expense Cost at high level of activity $ 38,000 $ 90,000 Less variable cost element: 5,000 units × $4 per unit 20,000 5,000 units × $12 per unit 60,000 Fixed cost element $ 18,000 $ 30,000 The cost formulas are: Shipping expense: $18,000 per month plus $4 per unit or Y = $18,000 + $4X. Salaries and Commissions expense: $30,000 per month plus $12 per unit or Y = $30,000 + $12X 3. Sales: (5,000 units × $100 per unit) = $500,000 Cost of goods sold: (5,000 units × $60 per unit) = $300,000 Shipping expense: (5,000 units × $4 per unit) = $20,000 Salaries and commissions expense: (5,000 units × $12 per unit) = $60,000

Answer 1