Question

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 $33 per unit sold Advertising expense $189,000 per quarter Sales commissions 8% of sales Shipping expense ? Administrative salaries $99,000 per quarter Insurance expense $10,900 per quarter Depreciation expense $69,000 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 35,000 $ 179,000 Second 37,000 $ 194,000 Third 42,000 $ 236,000 Fourth 38,000 $ 199,000 Year 2: First 36,000 $ 189,000 Second 39,000 $ 204,000 Third 53,000 $ 251,000 Fourth 50,000 $ 227,000 Required: 1. Using the high-low method, estimate a cost formula for shipping expense in the form Y = a + bX. 2. In the first quarter of Year 3, the company plans to sell 41,000 units at a selling price of $66 per unit. Prepare a contribution format income statement for the quarter.

Answer 1

Answer

• Working for requirement 1

	period	Units	Cost
High Level	Year 2, 3rd Quarter	53,000	$                251,000.00
Low Level	Year 1, 1st quarter	35,000	$                179,000.00
Difference		18,000	$                   72,000.00

• Requirement 1

Difference in Cost	$                                                             72,000.00
Difference in units	18,000
Variable cost per unit	$                                                                       4.00

Working		High Level	Low Level
A	Total Cost	$              251,000.00	$                179,000.00
B	Total Units	53000	35000
C	Variable cost per unit	$                           4.00	$                             4.00
D = B x C	Total Variable cost	$              212,000.00	$                140,000.00
E = A - D	Total Fixed Cost	$                 39,000.00	$                   39,000.00

Hence, Variable shipping expense = $ 4 per unit
Fixed shipping expense = $ 39000 per quarter

Cost Formula for shipping expense: Y = a +bX
Y [total shipping expense] = $ 39,000 + ($4.00 x Units)

• Requirement 2

Contribution margin format income statement

A = 41000 units x $ 66	Sales Revenue		$2,706,000
	Variable costs:
B =41000 units x $33	Cost of Goods Sold	$1,353,000
C = A x 8%	Sales Commission	$216,480
D = 41000 units x $ 4	Shipping Expenses	$164,000
E = B+C+D	Total variable cost		$1,733,480
F = A - E	Contribution margin		$972,520
	Fixed Costs:
	Advertising expense	$189,000
	Shipping Expenses	$39,000
	Administrative salaries	$99,000
	Insurance expense	$10,900
	Depreciation expense	$69,000
G	Total Fixed Cost		$406,900
H = F - G	Net Income		$565,620