Problem 5A-7 Cost Behavior; High-Low Method; Contribution FormatIncome Statement [LO5-10]

Morrisey & Brown, Ltd., of Sydney is a merchandising companythat is the sole distributor of a product that is increasing inpopularity among Australian consumers. The company’s incomestatements 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		8,500				9,000				9,500
Sales	$	850,000			$	900,000			$	950,000
Cost of goodssold		510,000				540,000				570,000
Grossmargin		340,000				360,000				380,000
Selling andadministrative expenses:
Advertisingexpense		37,000				37,000				37,000
Shippingexpense		110,000				115,600				121,200
Salaries andcommissions		155,000				162,800				170,600
Insuranceexpense		10,500				10,500				10,500
Depreciationexpense		17,000				17,000				17,000
Total sellingand administrative expenses		329,500				342,900				356,300
Net operatingincome	$	10,500			$	17,100			$	23,700

Required:

1. By analyzing the data from the company's income statements,classify each of its expenses (including cost of goods sold) aseither variable, fixed, or mixed.

2. Using the high-low method, separate each mixed expense intovariable and fixed elements. Express the variable and fixedportions of each mixed expense in the form Y = a + bX.

3. Redo the company’s income statement at the 9,500-unit levelof activity using the contribution format.