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	$27 per unit sold
Advertising expense	$177,000 per quarter
Sales commissions	6% of sales
Shipping expense	?
Administrative salaries	$87,000 per quarter
Insurance expense	$9,700 per quarter
Depreciation expense	$57,000 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	23,000	$	167,000
Second	25,000	$	182,000
Third	30,000	$	224,000
Fourth	26,000	$	187,000
Year 2:
First	24,000	$	177,000
Second	27,000	$	192,000
Third	42,250	$	244,000
Fourth	39,250	$	220,000

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 29,000 units at a selling price of $57 per unit. Prepare a contribution format income statement for the quarter.

Answer 1

Variable cost p.u = Change in cost/change in activity
Variable cost p.u = 244000-167000/42250-23000
variable cost p.u = 4
fixed cost = total cost-total variable cost
fixed cost = 244000- (42250*4)
Fixed cost = 75000
cost formula for shipping exp = Y = 75000+4X
2) Contribution income statement
Particulars			amount
sale (29000*57)				1653000
less: variable cost
cost of goods sold (29000*27)			783000
sale commission (1653000*6%)			99180
shipping expenses (29000*4)			116000
total variable cost				998180
contribution margin				654820
less: fixed cost
advertising exp			177000
administrative exp			87000
shipping expenses			75000
insurance exp			9700
depreciation expenses			57000
total fixed cost				405700
net operating income				249120

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