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: August 7,250 $ 797,500 478,500 319,000 September 7,750 $ 852,500 511,500 341,000 Morrisey & Brown, Ltd. Income Statements For the Three Months Ended September 30 July Sales in units 6,750 Sales $ 742,500 Cost of goods sold 445,500 Gross margin 297,000 Selling and administrative expenses: Advertising expense 33,800 Shipping expense 69,500 Salaries and commissions 125,000 Insurance expense 9,900 Depreciation expense 22,100 Total selling and administrative expenses 260,300 Net operating income $ 36,700 33,800 73,700 132,100 9,900 22,100 271,600 $ 47, 400 33,800 77,900 139,200 9,900 22,100 282,900 $ 58,100 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 7,750-unit level of activity using the contribution format. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Redo the company's income statement at the 7,750-unit level of activity using the contribution format. Morrisey & Brown, Ltd. Income Statement For the Month Ended September 30 Variable expenses: Fixed expenses: $ Required 2 Required 3 >

Answer 1

1)	Expenses				Classification
	cost of goods sold				Variable
	Advertising expense				fixed
	shipping expense				mixed
	Salaries and commission				mixed
	insurance expense				fixed
	Depreciation expense				fixed
2)	High low method
	shipping expense
			units	cost
	high		7,750	77,900
	low		6,750	69,500
	difference		1,000	8,400
	variable expense per unit 8400/1000 = $8.4
	fixed expense = 77900-7750*8.4=12,800
	Salaries and commission
			units	cost
	high		7,750	139,200
	low		6,750	125,000
	difference		1,000	14,200
	Variable expense per unit = 14200/1000=$14.2
	fixed expense = 139200-7750*14.2 =$29150
	cost formula
			Variable cost		Fixed cost	Formula
	shipping expense		8.4	per unit	12,800	Y=	12,800	+	8.4	per unit
	Salaries & commission		14.2	per unit	29,150	Y=	29,150	+	14.2	per unit
3)	Sales in units				7750
	Sales				852,500
	Variable expense
	Cost of goods sold			511,500
	Shipping expense			65,100
	Salaries and commission			110050
					686,650
	Contribution margin				165,850
	Fixed expense
	Advertising expense			33,800
	Shipping expense			12,800
	Salaries & commission			29,150
	insurance expense			9,900
	Depreciation expense			22,100
					107,750
	Net income				58,100