PROBLEM 6-4 Examining Cost Behaviour; High-Low Analysis; Contribution Margin Income Statement [LO1 - CC1, 3, 6; LO2 - CC9; LO3 - CC12] IECK FIGURE Morrisey & Brown, Ltd., of Sydney, Australia, is a merchandising firm that is the sole distributor of a prod- Shipping: A$18,000 uct that is increasing in popularity among Australian consumers. The company's income statements for the three most recent months follow: per month plus A$4 per unit MORRISEY & BROWN, LTD. Income Statements For the Four Quarters Ending December 31 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Sales in units 4,400 4,000 5,000 4,600 Sales revenue A$440,000 A$400,000 A$500,000 A$460,000 Less: Cost of goods sold 264,000 240,000 300,000 276,000 Gross margin 176,000 160,000 200,000 184,000 Less: Operating expenses: Advertising expense 21,000 21,000 21,000 21,000 Shipping expense 35,000 34,000 38,000 36,000 Salaries and commissions 83,000 78,000 90,000 85,000 Insurance expense 6,000 6,000 6,000 6,000 Depreciation expense 15,000 15,000 15,000 15,000 Total operating expenses 160,000 154,000 170,000 163,000 Net income A$ 16,000 A$ 6,000 A$ 30,000 A$ 21,000 (Note: Morrisey & Brown, Ltd.'s Australian-formatted income statement has been recast into the format common in Canada. The Australian dollar is denoted by AS.)Cost Behaviour: Analysis and Use Required: 1. Identify each of the company's expenses (including cost of goods sold) as being variable, fixed, or mixed. 2. Using the highlow method, separate each mixed expense into variable and xed elements. Slate the cost formula for each mixed expense. 3. Redo the company's income statement at the 5,000unit level of activity using the contribution format. 4. Assume that the company '5 sales are projected to be 4,500 units in the next quarter. Prepare a contribu- tion margin income statement. 263