PROBLEM 3: Cost Behavior; High-Low Method; Contribution Format Income

Statement [LO4, LO5, LO6]

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. 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.
EXERCISE 4: Traditional and Contribution Format Income Statements [LO6]
The Alpine House, Inc., is a large retailer of snow skis. The company assembled the information shown
below for the quarter ended March 31:

Required:
1. Prepare a traditional income statement for the quarter ended March 31.
2. Prepare a contribution format income statement for the quarter ended March 31.
3. What was the contribution toward fixed expenses and profits for each pair of skis sold during the
quarter? (State this figure in a single dollar amount per pair of skis.)
Exercise 5:
Marwick's Pianos, Inc., purchases pianos from a large manufacturer and sells them at the retail level. The
pianos cost, on the average, $2,450 each from the manufacturer. Marwick's Pianos, Inc., sells the pianos
to its customers at an average price of $3,125 each. The selling and administrative costs that the
company incurs in a typical month are presented below:

During August, Marwick's Pianos, Inc., sold and delivered 40 pianos.

Required:
1. Prepare an income statement for Marwick's Pianos, Inc., for August. Use the traditional format, with
costs organized by function.
2. Redo (1) above, this time using the contribution format, with costs organized by behavior. Show
costs and revenues on both a total and a per unit basis down through contribution margin.

3. Refer to the income statement you prepared in (2) above. Why might it be mis leading to show the
fixed costs on a per unit basis?