Question

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 8,000 8,500 9,000 Sales $ 840,000 $ 892,500 $ 945,000 Cost of goods sold 504,000 535,500 567,000 Gross margin 336,000 357,000 378,000 Selling and administrative expenses: Advertising expense 36,600 36,600 36,600 Shipping expense 95,000 100,200 105,400 Salaries and commissions 145,000 152,600 160,200 Insurance expense 8,850 8,850 8,850 Depreciation expense 24,400 24,400 24,400 Total selling and administrative expenses 309,850 322,650 335,450 Net operating income $ 26,150 $ 34,350 $ 42,550

Morrisey & Brown, Ltd. Income Statements For the Three Months Ended September 30
	July				August				September
Sales in units		8,000				8,500				9,000
Sales	$	840,000			$	892,500			$	945,000
Cost of goods sold		504,000				535,500				567,000
Gross margin		336,000				357,000				378,000
Selling and administrative expenses:
Advertising expense		36,600				36,600				36,600
Shipping expense		95,000				100,200				105,400
Salaries and commissions		145,000				152,600				160,200
Insurance expense		8,850				8,850				8,850
Depreciation expense		24,400				24,400				24,400
Total selling and administrative expenses		309,850				322,650				335,450
Net operating income	$	26,150			$	34,350			$	42,550

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. (Round the Variable cost per unit to 1 decimal place.)

Answer 1

1. Advertising expense - Fixed (Since cost is equal at every level)

Shipping expense - Mixed (Since per unit cost is not equal at each level)

Salaries and commissions - Mixed (Since per unit cost is not equal at each level)

Insurance expense - Fixed

Depreciation expense - Fixed

2. Shipping expense -

Variable expense = (100200-9500)/(8500-8000)=5200/500=10.4

At 8000 units, Fixed cost = Total cost - Variable cost = 95000-(8000*10.4)=11800

Mixed expense in the form Y = a+bx

At 8000 units, 95000 = 11800+(8000*10.4)

At 8500 units, 100200 = 11800+(8500*10.4)

At 9000 units, 105400 = 11800+(9000*10.4)

Salaries and commissions -

Variable expense = (152600-145000)/(8500-8000) = 7600/500 = 15.2

At 8000 units, 145000 = 23400+(8000*15.2)

At 8500 units, 152600 = 23400+(8500*15.2)

At 9000 units, 160200 = 23400+(9000*15.2)