Problem 6A-7 Cost Behavior; High-Low Method; Contribution Format Income Statement [LO6-10]

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		4,000				4,500				5,000
Sales	$	400,000			$	450,000			$	500,000
Cost of goods sold		240,000				270,000				300,000
Gross margin		160,000				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	$	6,000			$	18,000			$	30,000

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 5,000-unit level of activity using the contribution format.