Question

Problem 1-23A High-Low Method; Contribution Format Income Statement [LO1-5, LO1-6] 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 Cost Formula Cost of good sold $30 per unit sold Advertising expense $180,000 per quarter Sales commissions 7% of sales Shipping expense ? Administrative salaries $90,000 per quarter Insurance expense $10,000 per quarter Depreciation expense $60,000 per quarter Management has concluded that shipping expense is a mixed cost, containing both variable and fixed cost elements. Units sold and the related shipping expense over the last eight quarters follow: Quarter Units Sold Shipping Expense Year 1: First 26,000 $ 170,000 Second 28,000 $ 185,000 Third 33,000 $ 227,000 Fourth 29,000 $ 190,000 Year 2: First 27,000 $ 180,000 Second 30,000 $ 195,000 Third 40,400 $ 242,000 Fourth 37,400 $ 218,000 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 for shipping expense based on the data for the last eight quarters above. 2. In the first quarter of Year 3, the company plans to sell 35,000 units at a selling price of $60 per unit. Prepare a contribution format income statement for the quarter. (Do not round your intermediate calculations.)

Answer 1