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 $26 per unit sold Advertising expense $183,000 per quarter Sales commissions 7% of sales Shipping expense ? Administrative salaries $93,000 per quarter Insurance expense $10,300 per quarter Depreciation expense $63,000 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: Shipping Quarter Units Sold Expense Year 1: First 29,000 $ 173,000 Second 31,000 $ 188,000 Third 36,000 $ 230,000 Fourth 32,000 $ 193,000 Year 2 First 30,000 $183,000 Second 33,000 $ 198,000 Third 47,000 $ 245,000 Fourth 44,000 $221,000 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 Shipping Expense Units Sold High activity level Low activity level Change per unit Variable cost per unit Fixed cost element

Answer 1

1 Units Sold High activity level Low activity level Change 47000 $ 29000 $ 18000 $ Shipping Expense 245,000 173,000 72,000 Variable cost per unit Fixed cost element 4.00 Per unit 57,000 Y = 57000 + 4.00 X Working: Varaiable cost per unit = Change in cost / change in units = 72000 / 18000 = 4.00 Fixed cost = highest level cost - highest units x varaible cost per unit) = 245000 - (47000 x 4 ) = 57000 2 Milden Company Contribution format Income Statement For the first quarter $ 1,960,000 35000 x 56 $ $ $ 910,000 137,200 140,000 S $ 35000 x 26 1960000 x 7% 35000 x 4.00 1,187,200 772,800 Sales Revenue Variable Expenses Cost of Goods Sold Sales Commission Shipping Expense Total Variable Expense Contribution Margin Fixed Expenses Advertising Expense Shipping Expense Administrative Salaries Insurance Expense Depreciation Expense Total Fixed Expense Net Income $ $ $ $ $ 183,000 57,000 93,000 10,300 63,000 Given Calculated above Given Given Given $ 406,300 366.500