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		5,500				6,000				6,500
Sales	$	577,500			$	630,000			$	682,500
Cost of goods sold		346,500				378,000				409,500
Gross margin		231,000				252,000				273,000
Selling and administrative expenses:
Advertising expense		24,200				24,200				24,200
Shipping expense		57,000				60,200				63,400
Salaries and commissions		104,000				110,600				117,200
Insurance expense		9,200				9,200				9,200
Depreciation expense		19,600				19,600				19,600
Total selling and administrative expenses		214,000				223,800				233,600
Net operating income	$	17,000			$	28,200			$	39,400

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 6,500-unit level of activity using the contribution format.