PROBLEM 6-4 Examining Cost Behaviour: High-Low Analysis; Contribution Margin Income Statement [LO1 - CC1, 3, 6; LO2-CC9; LO3 - CC12] Morrisey & Brown, Ltd., of Sydney, Australia, is a merchandising firm that is the sole distributor of a prod- uct that is increasing in popularity among Australian consumers. The company's income statements for the three most recent months follow: IECK FIGURE Shipping: A$18,000 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 A$440,000 264,000 176,000 AS400,000 240,000 160,000 5,000 A$500,000 300,000 200,000 4,600 A$460,000 276,000 184,000 Sales revenue Less: Cost of goods sold Gross margin Less: Operating expenses: Advertising expense Shipping expense Salaries and commissions Insurance expense Depreciation expense Total operating expenses Net income 21,000 35,000 83,000 6,000 15.000 160,000 AS 16,000 21.000 34.000 78,000 6,000 15,000 154.000 AS 6,000 21.000 38,000 90,000 6,000 15.000 170.000 AS 30.000 21,000 36,000 85,000 6,000 15.000 163,000 AS 21.000 (Note: Morrisey & Brown, Led'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 263 Required: 1. Identify each of the company's expenses (including cost of goods sold) as being variable, fixed, or mixed 2. Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense. 3. Redo the company's income statement at the 5,000-unit level of activity using the contribution format. 4. Assume that the company's sales are projected to be 4.500 units in the next quarter. Prepare a contribu- tion margin income statement