High-Low Method; Contribution Format Income Statement
Alden Company has decided to use a contribution format income statement for internal planning purposes. The company has analyzed its expenses and has developed the following cost formulas:
Cost | Cost Formula |
Cost of goods sold | $20 per unit sold |
Advertising expense | $170,000 per quarter |
Sales commissions | 5% of sales |
Administrative salaries | $80,000 per quarter |
Shipping expense | ? |
Depreciation expense | $50,000 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 are given below:
Quarter | Units Sold | Shipping Expense |
Year 1: |
|
|
First | 16,000 | $160,000 |
Second | 18,000 | $175,000 |
Third | 23,000 | $217,000 |
Fourth | 19,000 | $180,000 |
Yea r 2: |
|
|
First | 17,000 | $170,000 |
Second | 20,000 | $185,000 |
Third | 25,000 | $232,000 |
Fourth | 22,000 | $208,000 |
Management 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:
I. Using the high-low method, estimate a cost formula for shipping expense.
2. In the first quarter of Year 3. the company plans to sell 21.000 units at a selling price of $50 per unit. Prepare a contribution format income statement for the quarter.
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