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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 company’s 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.

Identify each of the company’s 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. 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.

  

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