Chapter 5.A, Problem 7P

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

Morrissey & 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:

Morrissey& 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	180,000	200,000
Selling and administrative expenses:
Advertising expenses		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	1 5,000
Total selling and administrative expenses		154,000	162,000	170,000
Net operating income		$6,000	$18,000	$30,000

Required;

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.

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.

Redo the company's income statement at the 5,000-unit level of activity using the contribution format