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 of good sold Advertising expense Sales commissions Shipping expense Administrative salaries Insurance expense Depreciation expense Cost Formula $27 per unit sold $184,000 per quarter 7% of sales ? $94,000 per quarter $10,400 per quarter $64,000 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 Expense Units Sold Quarter Year 1: First Second Third Fourth Year 2: First Second Third Fourth 30,000 32,000 37,000 33,000 $174,000 $189,000 $231,000 $ 194,000 31,000 34,000 44,400 41,400 $184,000 $199,000 $246,000 $222,000 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.

Answer 1

1 Units Sold High activity level Low activity level Change 44400 $ 30000 $ 14400 $ Shipping Expense 246,000 174,000 72,000 Variable cost per unit Fixed cost element $ $ 5.00 Per unit 24,000 Y = 24000 + 5.00 X Working: Varaiable cost per unit = Change in cost / change in units = 72000 / 14400 = 5.00 Fixed cost = highest level cost -( highest units x varaible cost per unit) = 246000 - (44400 x 5 ) = 24000 2 Milden Company Contribution format Income Statement For the first quarter $ 2,035,000 37000 x 55 $ $ $ 999,000 142,450 185,000 37000 x 27 2035000 x 7% 37000 x 5.00 $ 1,326,450 708,550 $ 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 $ $ $ $ $ 184,000 24,000 94,000 10,400 64,000 Given Calculated above Given Given Given $ $ 376,400 332 150