Problem 5A-7 Cost Behavior; High-Low Method; Contribution Format Income Statemen
ID: 2340635 • Letter: P
Question
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 company’s income statements for the three most recent months follow:
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 company’s income statement at the 7,000-unit level of activity using the contribution format.
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
Explanation / Answer
Answer:
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.
Cost
Cost Behavior
Cost of Goods Sold
Variable
Advertising Expense
Fixed
Shipping Expense
Mixed
Salaries and Commissions
Mixed
Insurance Expense
Fixed
Depreciation Expense
Fixed
_________________________________________________________________
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.
Shipping Expense
Salaries and Commission
High (a)
65,200
123,600
Low (b)
$58,000
$110,000
Difference in Cost (c=A-B)
$7,200
$13,600
Difference in Sales Volume(d)
1,000 units
1,000 units
Variable Cost per Unit (E=c/d)
$ 7.20 per unit
$ 13.60 per unit
Fixed Cost per month (total cost-variable cost)
$14,800
$28,400
variable
Fixed
Formula (to calc cost "Y" at any level)
Shipping Expense
$ 7.20 per unit
14,800
Y=$14,800 + $7.2 per unit
Salaries and commissions
$ 13.60 per unit
28,400
Y=$28,400 + $13.6 per unit
_________________________________________________________________________
3.
Redo the company’s income statement at the 7,000-unit level of activity using the contribution format.
Morrissey and Brown Ltd.
Contribution Margin Income Statement
Activity Level : 7,000 units
Sales Revenue ( 7000 x $ 95)
$665,000
Less Variable Costs:
Cost of Goods Sold ( 7,000 x $ 57)
399,000
Shipping Expense ( 7,000 x $ 7.2)
50,400
Salaries and Commissions ( 7,000 x $ 13.6)
95,200
544,600
Contribution Margin
$120,400
Less: Fixed Cost
Advertising
26,200
Insurance
8,450
Shipping
14,800
Salaries and Commissions
28,400
Depreciation
17,900
Total Fixed Costs
95,750
Net Operating Income
$24,650
Cost
Cost Behavior
Cost of Goods Sold
Variable
Advertising Expense
Fixed
Shipping Expense
Mixed
Salaries and Commissions
Mixed
Insurance Expense
Fixed
Depreciation Expense
Fixed