Problem
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:
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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
|
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.