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 $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 $91,000 per quarter $10,100 per quarter $61,000 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 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 28,000 $181,000 31,000 $196,000 45,000 $243,000 42,000 $219,000 Fourth 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. Üsing the high-low method, estimate a cost formula for shipping expense based on the data for the last eight quarters above. Shipping Expense Units Sold High activity level Low activity level Change Variable cost per unit Fixed cost element per unit

Explanation / Answer

1) units Shipping 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 per unit Fixed cost element 63000 Variable cost per unit = 72000/18000 = $4per unit Fixed cost element     = 243,000-(45,000*4)= 63,000 Y= 63,000 + 4 X 2)                                        Milden Company Budgeted Contribution Format Income Statement For the First Quarter , year 3 Sales (37000*61) 2257000 Variable expenses: Cost of goods sold (37,000*31) 1147000 Sales commission (2,257,000*6%) 135420 Shipping expense (37000*4) 148000 total variable expense 1430420 Contribution margin 826580 Fixed expenses Advertising expense 181,000 Shipping expense 63,000 Administrative salaries 91,000 insurance expense 10,100 Depreciation expense 61,000 total fixed expense 406,100 Net income 420,480

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