milden company has an exclusive franchise to purchase a product from the manufac
ID: 2545408 • Letter: M
Question
milden company has an exclusive franchise to purchase a product from the manufacturer and distribut it on the retail 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 formula
cost of good sold $29 per unit sold
advertising expense $179,ooo per quarter
sales commissions 8%
shipping expenses ?
administrative salaries $89,000 per quarter
insurance expenses $9,900 per quarter
depreciation expenses $59,000 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
Quarter Unit Sold Shipping Expense
Year ;:
First 25,000 $169,000
Second 27,000 $184,000
Third 32,000 $226,000
Fourth 28,000 $189,000
Year 2:
First 26,000 $179,000
Second 29,000 $194,000
Third 37,000 $241,000
Fourth 34,000 $217,000
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 teh data for the last eight quarters above.
High activity level Units Sold Shipping Expense
Low activity level
Change
Variable cost per unit
Fixed cost element
2. In the first quarter of Year 3, the company plans to sell 33,000 units at a selling price of $59 per unit; Preparew a contributionformat income statement for the quarter.(Do not round your intermediate calculations)
Fourth
Explanation / Answer
Answer
Period
Unit Sold
Shipping expense
Highest Activity Level
Year 2, Third Quarter
37000
$241000
Low activity Level
Year 1, First quarter
25000
$169000
Change
12000
$72000
Variable (Shipping expense) cost per unit
A
Change in Shipping expense
$72000
B
Change in units Sold
12000
C= A / B
Variable cost per unit
$6
Calculation of Fixed Shipping expense
Working
High Level
Low Level
A
Total Shipping expense
$241000
$169000
B
Units sold
37000
25000
C
variable shipping expense per unit
$6
$6
D = B x C
Total variable shipping expense
$222000
$150000
E = A - D
Total Fixed Shipping expense
$19000
$19000
Fixed Element = $19,000
Hence, cost formula will be-
Total Shipping expenses = Total Fixed Cost + Total Variable Cost
Total Shipping expenses = $19000 + $6x
*where ‘x’ is the units sold.
Shipping expense as per cost formula for 33000 units will be:
$19000 + $6 x 33000 units
$19000 (Fixed) + $198000 (Variable)
= $217,000
Income Statement for 33000 units
Units
Per unit ($)
Amount ($)
Sales
33000
$59
1947000
(-) Variable cost:
Cost of Goods Sold
33000
29
957000
Shipping expense
33000
6
198000
Sales Commission
33000
4.72
155760
Total Variable cost
33000
$39.72
$1310760
Contribution Margin
33000
$19.28
$636240
(-) Fixed Cost:
Advertising expense
179000
Shipping expense
19000
Administrative salaries
89000
Insurance expense
9900
Depreciation expense
59000
Total Fixed Cost
$355900
Net Income
$280340
Period
Unit Sold
Shipping expense
Highest Activity Level
Year 2, Third Quarter
37000
$241000
Low activity Level
Year 1, First quarter
25000
$169000
Change
12000
$72000
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