Question

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Group Problem 3 Contribution Margin Format Income Statement Morrisey & Brown Ltd, of Sydney, 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. Type July 4,000 Aug 4,500 Sept 5,000 Sales in units Sales Revenue Less Cost of Goods Sold Gross Margin $400,000 240,000 $450,000 270.000 $500,000 300,000 $160,000 $180,000 $200,000 Less Operating Expenses: Advertising expense $21,000 $21,000 $21,000 Shipping expense 34,000 36,000 38,000 Salaries and commissions Insurance expense 78,000 84,000 90,000 6,000 6,000 15,000 15,000 6,000 15,000 Depreciation expense Total Operating Expenses $154,000 $162,000 $170,000 Net Income $6,000 $18,000 $30,000 a. Identify each expense as fixed, mixed, or variable. b. Use the high-low method to estimate a cost formula for each mixed cost. C. Redo the company income statement at the 5,000 unit level using a contribution margin format

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting sheet.

Answer - Parta) # a1) Cost of goods sold Per Unit Cost Per unit at 4000 sale units = 240000/4000 = $ 60 Per unit Cost Per unit at 5000 sale units 1 = 300000/5000 2 = $ 60 Per unit 4 Thus cost of goods sold is variable 6 a2) 7 advertising cost is fixed as it remains same for all level of sales 3 a3) Shipping cost for 4000 units 1 =34000/4000 2 = $ 8.5 4 Shipping cost for 5000 units 5 = 38000/5000 5 = $ 7.6 3 Thus this is mixed cost as cost per unit has changed and in total it has also changed

10 a4)Salaries and commision 1 commision cost per unit at 4000 units 2 = 78000/4000 3 = $ 19.5 5 commision cost per unit at 5000 units 6 = 90000/5000 7 = $ 18 8 9 Thus this is mixed cost as cost per unit has changed and in total it has also changed 1 a5) 2 insurance expense is fixed as it remains same for all level of sales 4 a6) 5 Depreciation expense is fixed as it remains same for all level of sales 7 Thus the final answer is 8 Particular 9 Cost of goods sold 0 Advertising expense 1 Shipping expense 2 Salaries and commission 3 Insurance expense 4 Depreciation expense Cost Variable Cost Fixed Cost Mixed Cost Mixed Cost Fixed Cost Fixed Cost

5b) Variable cost for shipping expense = (high cost - low cost)/(high level activity-low level activity) = (38000-34000)/(5000-4000) =$ 4 Per unit - Fixed cost for shipping expense = total cost of 5000 units - variable cost of 5000 units = 38000 - 5000*4) = $ 18000 Variable cost of salaries and commission = (high cost - low cost)/(high level activity-low level activity) P = ( 90000-78000)/(5000-4000) = $ 12 Per unit - Fixed cost for salaries and commission = total cost of 5000 units - variable cost of 5000 units = 90000 - 5000*12) = $ 30000 Thus the cost formula for following mixed cost shipping expense = 18000 + (4* no. of units) Salaries and commission = 30000 + (12* no. of units)

32 Part c) 34 Contribution Format Income Statement for 5000 Units 35 Particulars 36 Sales Revenue 500000 37 Cost of goods sold (60*5000) 300000 38 Variable shipping expense (4*5000) 20000 39 Variable salaries and commission (11 60000 20 Contribution Margin 120000 21 Less Fixed Cost 12 Advertising expense 210001 23 Fixed Shipping Cost 18000 34 Fixed Salaries and Commission 30000 35 Insurance expense 60001 36 Depreciation expense 15000 37 Net Income 30000