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 Advertising expense Sales commissions Shipping expense Administrative salaries $27 per unit sold $184,000 per quarter 7% of sales $94,000 per quarter $10,400 per quarter $64,000 per quarter Insurance expense Depreciation expense 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: Shipping Expense Quarter Units Sold Year 1: $ 174,000 $ 189,000 $ 231,000 $ 194, 000 First 30,000 32,000 37,000 33,000 Second Third Fourth Year 2: First $ 184,000 $ 199,000 $ 246, 000 $ 222,000 31,000 34,000 44,400 41,400 Second Third Fourth 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 37,000 units at a selling price of $55 per unit. Prepare a contribution format income statement for the quarter. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Using the high-low method, estimate a cost formula for shipping expense in the form Y = a + bX. < Required 1 Required 2 >

Answer 1

Requirement 1

Y=$24000 +$5X

Fixed cost is $24000 and variable cost is $5 per unit sold

Working

		Cost	No. of activities
A	High Level	$       2,46,000.00	44400
B	Low Level	$       1,74,000.00	30000
C=A-B	Difference	$          72,000.00	$            14,400.00
A	Cost difference	$          72,000.00
B	No. of activities difference	14400
C=A/B	Variable cost per unit	$                     5.00
		High Level	Low Level
A	No. of activities	44400	30000
B	Variable cost per unit	$                5.0000	$                  5.0000
C=AxB	Total Variable cost	$       2,22,000.00	$        1,50,000.00
D	Total cost	$       2,46,000.00	$        1,74,000.00
E=D-C	Total fixed cost	$          24,000.00	$            24,000.00

Requirement 2

Milden Company
Contribution margin Income statement
For the First Quarter , Year 3
Sales		$ 2,035,000
Less: Variable costs
Variable Cost of goods sold	$ 999,000
Variable selling expenses	$ 185,000
Variable selling commission	$ 142,450
Total Variable cost		$ 1,326,450
Contribution margin		$ 708,550
Less: Fixed Costs
Advertising expense	$ 184,000
Shipping expenses	$ 24,000
Administrative salaries	$ 94,000
Insurance expense	$ 10,400
Depreciation expense	$ 64,000
Total Fixed Costs		$ 376,400
Net Income		$ 332,150