Milden Company is a distributor who wants to start using a contribution format i
ID: 2556065 • Letter: M
Question
Milden Company is a distributor who wants to start using a contribution format income statement for planning purposes. The company has analyzed its expenses and developed the following cost formulas: Cost Cost of good sold Advertiaing expense Sales commiasions Shipping expense Adminiatrative salaries Inaurance expense Depreciation expense Cost Formala $22 per unit sold $172,000 per quarter 5% of sales 82,000 per quarter $9,200 per quarter $52,000 per quarter Because shipping expense is a mixed cost, the company needs to estimate the variable shipping expense per unit sold and the fixed shipping expense per quarter using the following data: Shipping Quarter Units Sold Expense Year 1 First Second Third Fourth 18,000 162,000 20,000177,000 25,000219,000 21,000182,000 Year 21 Pirst Second Third Fourth 19,000 172,000 22,000 187,000 30,000 234,000 27,000 210,000Explanation / Answer
Solution (1):
Particulars
Units Sold
Shipping Expense
High activity level
30,000
$ 234,000
Low activity level
18,000
$ 162,000
Change
12,000
$ 72,000
Variable cost per unit*
$ 6 per unit
Fixed cost element**
$ 54,000
Therefore, the cost formula for shipping expense is: Y = $54,000 + $6X
*Variable cost per unit = Change in shipping expenses / Change in units sold
= $ 72,000 / 12,000 units
= $ 6 per unit
** Fixed cost element
=Total shipping expenses at High activity level- Variable element
=Total shipping expenses at High activity level- (High activity level units X Variable cost per unit)
=$ 234,000 – (30,000 X $ 6)
=$ 234,000 - $ 180,000
=$ 54,000
Note: High level activity means highest units sold and maximum shipping expense among the given data. In the same way, low level activity means lowest units sold and minimum shipping expense among the given data.
Solution (2):
Milden Company
Budgeted Contribution Format Income Statement
For the First Quarter, Year 3
Particulars
Amount ($)
Amount ($)
Sales (25,000 units X $ 52 per unit)
1,300,000
Variable expenses:
Cost of goods sold (25,000 units X $ 22 per unit)
550,000
Sales commissions (5 % of $ 1,300,000)
65,000
Shipping expense (25,000 units X $ 6 per unit)
150,000
Total variable expenses
(765,000)
Contribution margin
535,000
Fixed expenses:
Advertising expense
172,000
Shipping expense
54,000
Administrative salaries
82,000
Insurance expense
9,200
Depreciation expense
52,000
Total fixed expenses
(369,200)
Net operating income
165,800
Particulars
Units Sold
Shipping Expense
High activity level
30,000
$ 234,000
Low activity level
18,000
$ 162,000
Change
12,000
$ 72,000
Variable cost per unit*
$ 6 per unit
Fixed cost element**
$ 54,000