Question

Problem 5A-7 Cost Behavior; High-Low Method; Contribution Format Income Statement [LO5-10]

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		8,500				9,000				9,500
Sales	$	850,000			$	900,000			$	950,000
Cost of goods sold		510,000				540,000				570,000
Gross margin		340,000				360,000				380,000
Selling and administrative expenses:
Advertising expense		37,000				37,000				37,000
Shipping expense		110,000				115,600				121,200
Salaries and commissions		155,000				162,800				170,600
Insurance expense		10,500				10,500				10,500
Depreciation expense		17,000				17,000				17,000
Total selling and administrative expenses		329,500				342,900				356,300
Net operating income	$	10,500			$	17,100			$	23,700

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.

3. Redo the company’s income statement at the 9,500-unit level of activity using the contribution format.

Answer 1

1. Classification of   cost/ Expense
Cost	Cost Behavior
Cost of Goods Sold	Variable
Advertising Expense	Fixed
Shipping Expense	Mixed
Salaries and Commissions	Mixed
Insurance Expense	Fixed
Depreciation Expense	Fixed

2. Seperation of Mixed Expense into Variable and Fixed Expense
	Shipping Expense	Salaries and Commission
High	$1,21,200	$1,70,600
Low	$1,10,000	$1,55,000
Difference in Cost	$11,200	$15,600
Difference in Sales Volume	1,000 units	1,000 units
Variable Cost per Unit	$11	$16
Fixed Cost per month	$14,800	$22,400
	(110000-(8500*$11.2)	(155000-(8500*$15.6)

Morrissey and Brown Ltd.
Contribution Margin Income Statement
Activity Level : 9500 units
Sales Revenue		$9,50,000
Less Variable Costs:
Cost of Goods Sold	$5,70,000
Shipping Expense ( 9500 x $11.20)	$1,06,400
Salaries and Commissions ( 9500 x $15.60)	$1,48,200	$8,24,600
Contribution Margin		$1,25,400
Less: Fixed Cost
Advertising	$37,000
Insurance	$10,500
Shipping	$14,800
Salaries and Commissions	$22,400
Depreciation	$17,000
Total Fixed Costs		$1,01,700
Net Operating Income		$23,700