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 product that is increasing in popularity among Australian consumers. The company's income statements for the three most recent months follow: MORRISEY & BROWN, LTD. Income Statements For the Four Quarters Ending December 31 Quarter 1 Quarter 2 Sales in units 6,500 6,000 Sales revenue A$ 650,000 $600,000 Less: Cost of goods sold 390,000 360,000 Gross margin 260,000 240,000 Less: Operating expenses: Advertising expense 23,000 23,000 Shipping expense 42,000 44,000 Salaries and commissions 90,000 82,000 Insurance expense 8,000 8,000 Depreciation expense 17,000 17,000 Total operating expenses 180,000 174,000 Net income A$ 80,000 A$ 66,000 Quarter 3 7,400 A$ 740,000 444,000 296,000 Quarter 4 6,600 A$660,000 396,000 264,000 23,000 49,600 98,800 8,000 17,000 196,400 A$ 99,600 23,000 43,600 96,600 8,000 17,000 188, 200 A$ 75,800 (Note: Morrisey & Brown, Ltd.'s Australian-formatted income statement has been recast into the format common in Canada. The Australian dollar is denoted by A$.) Required: 1. Identify each of the company's expenses (including cost of goods sold) as being variable, fixed, or mixed. Classification Expenses Cost of goods sold Advertising expense Shipping expense Salaries and commissions Insurance expense Depreciation expense 2-a. Using the high-low method, separate each mixed expense into variable and fixed elements. Variable Cost Fixed Cost A$ per unit A$ A$ per unit A$ A$ per unit A$ 2-b. Using the high-low method, state the cost formula for each mixed expense. Y= A$ + A$ Y= A$ + A$ X X X Y= A$ + A$ 3. Redo the company's income statement at the 7,400-unit level of activity using the contribution format. MORRISEY & BROWN, LTD. Contribution Margin Income Statement For the Quarter Ended September 30 Sales in units A$ Less: Variable expenses: A$ 0 0 Less: Fixed expenses: 0 A$ 0 4. Assume that the company's sales are projected to be 5,500 units in the next quarter. Prepare a contribution margin income statement. MORRISEY & BROWN, LTD. Contribution Margin Projected Income Statement For the Quarter Ended March 31 Sales in units A$ Less: Variable expenses: A$ 0 0 Less: Fixed expenses: 0 A$ 0