Question

Kindly provide a detailed explanation to the following question. So i can understand and solve on my own

Milden Company has an exclusive franchise to purchase a product from the manufacturer and distribute it on the retail level. As an aid in planning, the company has decided to start using a contribution format income statement. To have data to prepare such a statement, the company has analyzed its expenses and has developed the following cost formulas. Cost of goods sold $35 per unit sold Advertising expense $10,000 per quarter Sales commissions 6% of sales Shipping expenses $145,000 per quarter Administrative salaries $9,000 per quarter Insurance expense $76,000 per quarter Depreciation expense

Management has conducted that shipping expense is mixed cost, containing both variable and fixed cost elements. Units sold and the related shipping expense over the last quarters follows: Quarter Units sold Shipping expense Year 1: 10,000 $113,000 First 16,000 $175,000 Second 18,000 $190,000 Third 15,000 $164,000 Year 2: First 11,000 $130,000 Second 17,000 $185,000 Third 20,000 $210,000 Fourth 13,000 $147,000 Milden Company’s president would like a cost formula derived for shipping expense so that a budgeted contribution format income statement can be prepared for the next quarter. Required: 1. Using the high-low method, estimate a cost formula derived for shipping expense. 2. In the first quarter of Year 3, the company plans to sell 12,000 units at a selling price of $100 per unit. Prepare a contribution format income statement for the quarter.

Answer 1

Answer 1

	Shipping
	Units sold	Expense
High activity level	20000	210000
Low activity level	10000	113000
Change	10000	97000
variable cost per unit	9.7	per unit
Fixed cost	16000

Y=$16000+$9.7X

Working note:

Variable cost per unit =Change in cost/Change in activity

=(210000-113000)/(20000-10000)

=$9.7per unit

Calculation of fixed cost

Total shipping expense athigh activity level=210000

less: variable cost(20000*9.7)=194000

Fixed cost=16000

Answer 2

Milden Company
Budgeted Contribution Format Income Statement
For First Quarter, Year 3
Sales		1200000
Variable Expenses:
Cost of good sold	420000
sales commissions	72000
shipping expense	116400
Total variable expenses		608400
contribution margin		591600
Fixed expenses:
Advertising expense	10000
shipping expense	16000
Administrative salaries	145000
Insurance expense	9000
Depreciation expense	76000
Total fixed expenses		256000
Net operating income		335600