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		6,000				6,500				7,000
Sales	$	570,000			$	617,500			$	665,000
Cost of goods sold		342,000				370,500				399,000
Gross margin		228,000				247,000				266,000
Selling and administrative expenses:
Advertising expense		26,200				26,200				26,200
Shipping expense		58,000				61,600				65,200
Salaries and commissions		110,000				116,800				123,600
Insurance expense		8,450				8,450				8,450
Depreciation expense		17,900				17,900				17,900
Total selling and administrative expenses		220,550				230,950				241,350
Net operating income	$	7,450			$	16,050			$	24,650

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 7,000-unit level of activity using the contribution format.