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PROBLEM

Cost Behavior; High-Low Method; Contribution Format Income Statement

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

Sales in units  4,000 4,500 $500,000
Sales revenue A$400,000 A$450,000 A$5,000
Cost of goods sold 240,000 270,000 300,000
Gross margin 60,000 180,000 200,000
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 A$6,000 A$18,000 A$30,000

(Note: Morrisey & Brown, Ltd's Australian-formatted income statement has been recast in the format common in the United States. The Australian dollar is denoted here by AS.)

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.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M91973816

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