Milden Company has an exclusive franchise to purchase a product from the manufac
ID: 2510553 • Letter: M
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:
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:
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 the data for the last eight quarters above.
2. In the first quarter of Year 3, the company plans to sell 27,000 units at a selling price of $53 per unit. Prepare a contribution format income statement for the quarter. (Do not round your intermediate calculations.)
Explanation / Answer
1) units Shipping Sold expense High activity level 33,400 235,000 low activity level 19,000 163,000 change 14,400 72,000 Variable cost per unit 5 per unit Fixed cost element 68000 Variable cost per unit = 72000/14400 = $5per unit Fixed cost element = 235,000-(33400*5)= 68000 Y= 68,000 + 5 X 2) Milden Company Budgeted Contribution Format Income Statement For the First Quarter , year 3 Sales (27000*53) 1431000 Variable expenses: Cost of goods sold (27000*23) 621000 Sales commission (1,431,000*6%) 85860 Shipping expense (27000*5) 135000 total variable expense 841860 Contribution margin 589140 Fixed expenses Advertising expense 173,000 Shipping expense 68,000 Administrative salaries 83,000 insurance expense 9,300 Depreciation expense 53,000 total fixed expense 386,300 Net income 202,840