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

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 companys income statements for the three most recent months follow:

Morrisey & Brown, Ltd. Income Statements For the Three Months Ended September 30
	July				August				September
Sales in units		7,750				8,250				8,750
Sales	$	775,000			$	825,000			$	875,000
Cost of goods sold		465,000				495,000				525,000
Gross margin		310,000				330,000				350,000
Selling and administrative expenses:
Advertising expense		28,200				28,200				28,200
Shipping expense		89,500				94,500				99,500
Salaries and commissions		140,000				147,500				155,000
Insurance expense		7,200				7,200				7,200
Depreciation expense		21,600				21,600				21,600
Total selling and administrative expenses		286,500				299,000				311,500
Net operating income	$	23,500			$	31,000			$	38,500

Required:

1. 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.

2. 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.

3. Redo the companys income statement at the 8,750-unit level of activity using the contribution format.