Question

Question 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	$27 per unit sold
Advertising expense	$184,000 per quarter
Sales commissions	7% of sales
Shipping expense	?
Administrative salaries	$94,000 per quarter
Insurance expense	$10,400 per quarter
Depreciation expense	$64,000 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	30,000	$	174,000
Second	32,000	$	189,000
Third	37,000	$	231,000
Fourth	33,000	$	194,000
Year 2:
First	31,000	$	184,000
Second	34,000	$	199,000
Third	44,400	$	246,000
Fourth	41,400	$	222,000

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 37,000 units at a selling price of $55 per unit. Prepare a contribution format income statement for the quarter. (Do not round your intermediate calculations.)

       

Answer 1

Answer 1.

Highest Shipping Expense = $246,000
Highest Number of units sold = 44,400

Lowest Shipping Expense = $174,000
Lowest Number of units sold = 30,000

Variable Shipping Expense per Unit = ($246,000 - $174,000) / (44,400 - 30,000)
Variable Shipping Expense per Unit = $5.00

Fixed Shipping Expenses = Highest Shipping Expense - Variable Shipping Expense per Unit * Highest Number of units sold
Fixed Shipping Expenses = $246,000 - $5.00 * 44,400
Fixed Shipping Expenses = $24,000

Cost Formula for Shipping Expense is:

Y = $24,000 + $5.00 * X, where X is number of units sold

Answer 2.