Morrisey Brown Ltd of Sydney is a merchandising company tha

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:

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.

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

Solution

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 5,000 38,000 low 4,000 34,000 difference 1,000 4,000 variable expense per unit 4000/1000 = $4 fixed expense = 38000-5000*4              = $18,000 Salaries and commission units cost high 5,000 90,000 low 4,000 78,000 difference 1,000 12,000 Variable expense per unit = 12000/1000=$12 fixed expense = 90000 - 5000*12   = $30,000 cost formula shiiping expense                   Y   =   18000 + 4 per unit Salaries & commission        Y    = 30000+12per unit 3) Sales in units 5000 Sales 500,000 Variable expense Cost of goods sold 300000 Shipping expense 20,000 Salaries and commission 60000 380,000 Contribution margin 120,000 Fixed expense Advertising expense 21,000 Shipping expense 18,000 Salaries & commission 30,000 insurance expense 6,000 Depreciation expense 15,000 90,000 Net income 30,000