Question

Milden Company has an exclusive franchise to purchase a product from the manufacturer and distribute it on the reta 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 $30 per unit sold $180,000 per quarter 7% of sales $90,000 per quarter $10,000 per quarter $60,000 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 Units Sold Expense Quarter Year 1 First Second Third Fourth 26,000 $170,000 28,000 $185,000 33,000 $227,000 29,000 $190,000 Year 2: First Second Third Fourth 27,000 $180,000 30,000 $195,000 40,400 $242,000 37,400 $218,000 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 Variable cost per unit Fixed cost element per unit

Answer 1

1)
				units	Shipping
				Sold	expense
	High activity level			40,400	242,000
	low activity level			26,000	170,000
	change			14,400	72,000
	Variable cost per unit			5	per unit
	Fixed cost element			40000
	Variable cost per unit = 72000/14400 = $5per unit
	Fixed cost element     = 242,000-(40400*5)=				40,000
	Y=	40,000	+	5	X