Milden Company has an exclusive franchise to purchase a product from the manufac

Question

Milden Company has an exclusive franchise to purchase a product from the manufacturer and distribute 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 t Formula $31 per unit sold $181,000 per quarter 6% of sales Cost of good sold Advertising expense Sales commissions Shipping expense Administrative salaries Insurance expense Depreciation expense$61,000 per quarter $91,000 per quarter $10,100 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 27,000 $171,000 29,000 $186,000 34,000 $228,000 30,000 $191,000 Year 2 First Second Third Fourth 28,000 $181,000 31,000 $196,000 45,000 $243,000 42,000 $219,000 Miden 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. Úsing the high-low method, estimate a cost formula for shipping expense based on the data for the last eight quarters above. Shipping Units Sold Expense High activity level Low activity level Change Variable cost per unit Fixed cost element per unit

Explanation / Answer

1.

Y = $63,000 + $4.00 X

Shipping Units Sold Expense High activity level 45,000 $243,000 Low activity level 27,000 $171,000 Change 18,000 $72,000 Variable cost per unit $4.00 per unit Fixed cost element $63,000

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