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 Formula $26 per unit sold $183,000 per quarter 7% of sales Cost Cost of good sold Advertising expense Sales commissions Shipping expense Administrative salaries Insurance expense Depreciation expense $93,000 per quarter $10,300 per quarter $63,000 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: Shipping Expense Units Sold Quarter Year 1: First Second Third Fourth Year 2: First Second Third Fourth 29,200 31,800 36,000 32,eee $ 173,000 $ 188.000 $ 230,000 $ 193,000 30,000 33,000 47,000 44,000 $183,000 $ 198,000 $ 245,000 $221,000 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 35,000 units at a selling price of $56 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 se in the form Y = a + bx. Using the high-low method, estimate a cost formula for shipping expense in the form Y = a + bx. Y=

Answer 1

Solution:

Part 1. Variable cost per unit (b) = (Highest shipping cost - Lowest shipping cost) / (Highest units sold - lowest units sold

= ($245,000 - 173,000) / (47,000 - 29,000)

= $ 4.00

so, fixed cost (a) = $173,000 - 29,000*$4.00 = $57,000

Hence, cost formula for shipping cost is : Y = $57,000 + $4.00X

Part 2.

Budgeted Contribution Format Income Statement For the First Quarter, Year 3 Sales revenue $ 1,960,000 Variable expense: Cost of goods sold 910,000 Sales commissions 137,200 Shipping expense 140,000 Total variable expenses (1,187,200) Contribution Margin $ 772,800 Fixed expense: Advertising expense 183,000 Shipping expense 57,000 Administrative salaries 93,000 Insurance expenses 10,300 Depreciation expense 63,000 Total fixed expense (406,300) Net Operating Income or profit $ 366,500

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