Problem 5A-7 Cost Behavior; High-Low Method; Contribution Format Income Statemen
ID: 2401333 • 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 6,500-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 5,500 6,000 6,500 Sales $ 577,500 $ 630,000 $ 682,500 Cost of goods sold 346,500 378,000 409,500 Gross margin 231,000 252,000 273,000 Selling and administrative expenses: Advertising expense 24,200 24,200 24,200 Shipping expense 57,000 60,200 63,400 Salaries and commissions 104,000 110,600 117,200 Insurance expense 9,200 9,200 9,200 Depreciation expense 19,600 19,600 19,600 Total selling and administrative expenses 214,000 223,800 233,600 Net operating income $ 17,000 $ 28,200 $ 39,400
Explanation / Answer
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Cost Cost Behavior Cost of Goods Sold Variable Advertising Expense Fixed Shipping Expense Mixed Salaries and Commissions Mixed Insurance Expense Fixed Depreciation Expense Fixed