PROBLEM
Cost Behavior; High-Low Method; Contribution Format Income Statement
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:
Morrisey & Brown, Ltd.
Income Statements
For the Three Months Ended September 30
| Sales in units |
4,000 |
4,500 |
$500,000 |
| Sales revenue |
A$400,000 |
A$450,000 |
A$5,000 |
| Cost of goods sold |
240,000 |
270,000 |
300,000 |
| Gross margin |
60,000 |
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 |
A$6,000 |
A$18,000 |
A$30,000 |
(Note: Morrisey & Brown, Ltd's Australian-formatted income statement has been recast in the format common in the United States. The Australian dollar is denoted here by AS.)
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.