Problem:
Morrisey & Brown, Ltd., of Sydney is a merchandising firm 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 Ending September 30
July August September
Sales in units 4000 4500 5000
Sales revenue A$400,000 A$450,000 A$500,000
Cost of goods sold 240000 270000 300000
Gross margin 160000 180000 200000
Selling and administrative expenses:
Advertising expense 21,000 21,000 21,000
Shipping expense 34,000 36,000 38,000
Salaries and commissions 78,000 84,000 90,000
Insurance expense 6000 6000 6000
Depreciation expense 15000 15000 15000
Total selling and administrative expenses 154,000 162,000 170,000
Net operating income A$ 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 by A$.)
Required:
1. Identify each of the company's expenses (including cost of goods sold) as either a variable, fixed, or mixed cost.
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.