Morrisey & Brown, Ltd., of Sydney is a merchandising companythat is the sole distributor of a product that is increasing inpopularity among Australian consumers. The company’s incomestatements for the three most recent months follow:
Morrisey & Brown, Ltd.Income StatementsFor 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 administrativeexpenses:
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 administrativeexpenses
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 ofgoods sold) as either variable, fixed, or mixed.
Expenses
Classification
Cost of goods sold
Advertising expense
Shipping expense
Salaries and commissions
Insurance expense
Depreciation expense
2. Using the high-low method, separate each mixed expense intovariable and fixed elements. State the cost formula for each mixedexpense.
Variable Cost
Fixed Cost
Formula
per unit
Y =
+
per unit
per unit
Y =
+
per unit
3. Redo the company’s income statement at the 5,000-unit levelof activity using the contribution format.
Morrisey & Brown,Ltd.
Income Statement
For the Month Ended September30
Variable expenses:
0
Fixed expenses:
0
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