Question

1.

Milden Company is a distributor who wants to start using a contribution format income statement for planning purposes. The company has analyzed its expenses and developed the following cost formulas:

Cost	Cost Formula
Cost of good sold	$25 per unit sold
Advertising expense	$175,000 per quarter
Sales commissions	7% of sales
Shipping expense	?
Administrative salaries	$85,000 per quarter
Insurance expense	$9,500 per quarter
Depreciation expense	$55,000 per quarter

Because shipping expense is a mixed cost, the company needs to estimate the variable shipping expense per unit sold and the fixed shipping expense per quarter using the following data:

Quarter	Units Sold	Shipping Expense
Year 1:
First	21,000	$	165,000
Second	23,000	$	180,000
Third	28,000	$	222,000
Fourth	24,000	$	185,000
Year 2:
First	22,000	$	175,000
Second	25,000	$	190,000
Third	35,400	$	237,000
Fourth	32,400	$	213,000

Required:

1. Using the high-low method, estimate a cost formula for shipping expense in the form Y = a + bX.(Round the Variable cost per unit to 2 decimal places.)

	Y = + X

2. In the first quarter of Year 3, the company plans to sell 31,000 units at a selling price of $55 per unit. Prepare a contribution format income statement for the quarter.

	Milden Company Budgeted Contribution Format Income Statement For the First Quarter, Year 3 Variable expenses: Total variable expenses Fixed expenses:    Total fixed expenses

2.

Last year Minden Company introduced a new product and sold 25,200 units of it at a price of $92 per unit. The product's variable expenses are $62 per unit and its fixed expenses are $838,500 per year.

Required:

1. What was this product's net operating income (loss) last year?

2. What is the product's break-even point in unit sales and dollar sales?

3. Assume the company has conducted a marketing study that estimates it can increase annual sales of this product by 5,000 units for each $2 reduction in its selling price. If the company will only consider price reductions in increments of $2 (e.g., $68, $66, etc.), what is the maximum annual profit that it can earn on this product? What sales volume and selling price per unit generate the maximum profit?

4. What would be the break-even point in unit sales and in dollar sales using the selling price that you determined in requirement 3?

Answer 1

Answer to Question 1:

Requirement 1:

Highest Activity:

Shipping expense = $237,000
Units sold = 35,400

Lowest Activity:

Shipping expense = $165,000
Units sold = 21,000

Variable shipping expense per unit = (Shipping expense at highest activity - Shipping expense at lowest activity) / (Units sold at highest activity - Units sold at lowest activity)
Variable shipping expense per unit = ($237,000 - $165,000) / (35,400 - 21,000)
Variable shipping expense per unit = $5.00

Fixed shipping expense = Shipping expense at highest activity - Units sold at highest activity * Variable shipping expense per unit
Fixed shipping expense = $237,000 - 35,400 * $5.00
Fixed shipping expense = $60,000

Requirement 2: