Question

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	$23 per unit sold
Advertising expense	$173,000 per quarter
Sales commissions	6% of sales
Shipping expense	?
Administrative salaries	$83,000 per quarter
Insurance expense	$9,300 per quarter
Depreciation expense	$53,000 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	19,000	$	163,000
Second	21,000	$	178,000
Third	26,000	$	220,000
Fourth	22,000	$	183,000
Year 2:
First	20,000	$	173,000
Second	23,000	$	188,000
Third	33,400	$	235,000
Fourth	30,400	$	211,000

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.

	Y = $68,000 + $5 X

2. In the first quarter of Year 3, the company plans to sell 27,000 units at a selling price of $53 per unit. Prepare a contribution format income statement for the quarter. (Do not round your intermediate calculations.)

	Milden Company Budgeted Contribution Format Income Statement For the First Quarter, Year 3 Sales Variable expenses: Cost of goods sold Sales commissions Shipping expense Total variable expenses 0 0 Fixed expenses: Total fixed expenses 0 Net operating income $0

Answer 1

1)
				units	Shipping
				Sold	expense
	High activity level			33,400	235,000
	low activity level			19,000	163,000
	change			14,400	72,000
	Variable cost per unit			5	per unit
	Fixed cost element			68000
	Variable cost per unit = 72000/14400 = $5per unit
	Fixed cost element     = 235,000-(33400*5)=				68000
	Y=	68,000	+	5	X
2)	Milden Company
	Budgeted Contribution Format Income Statement
	For the First Quarter , year 3
	Sales		(27000*53)			1431000
	Variable expenses:
	Cost of goods sold		(27000*23)		621000
	Sales commission		(1,431,000*6%)		85860
	Shipping expense		(27000*5)		135000
	total variable expense					841860
	Contribution margin					589140
	Fixed expenses
	Advertising expense				173,000
	Shipping expense				68,000
	Administrative salaries				83,000
	insurance expense				9,300
	Depreciation expense				53,000
	total fixed expense					386,300
	Net income					202,840