Alden Company has decided to use a contribution format income statement for inte

Question

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 of goods sold $20 per unit sold

advertising expense $170000 per quarter

sales commissions 5% of sales

Administrative salaries $80000 per quarter

shipping expense ?

Depreciation expense $50000 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:

Year 1

First 16000 units sold       $160000 shipping expense

second 18000 units sold  $175000 shipping expense

third 23000 units sold       $217000 shipping expense

fourth 19000 units sold    $180000 shipping expense

Year 2

First 17000 units sold        $170000 shipping expense

second 20000 units sold   $185000 shipping expense

third 25000 units sold        $232000 shipping expense

fourth 22000 units sold     $208000 shipping expense

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

Using the high-low method, estimate a cost formula for shipping expense.

In the first quarter of Year 3, the company plans to sell 21000 units at a selling price of $50 per unit.  Prepare a contribution format income statement for the quarter.

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Variable Shipping Expense = (232000 - 160000)/(25000 - 16000) = 8

Fixed Cost = 232000 - 25000*8 = 32000

Cost Formula = 32000 + 8X (where X represents number of units)

Part B:

Thanks.

Sales (21000*50) 1050000 Less Variable Costs
Cost of Goods Sold (21000*20) 420000 Sales Commission (1050000*5%) 52500 Shipping Expense (21000*8) 168000 Contribution 409500 Less Fixed Costs
Advertising Expense 170000 Administrative Salaries 80000 Shipping Expense 32000 Depreciation Expense 50000 Net Income 77500

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