Milden Company has an exclusive franchise to purchase a product from the manufac
ID: 2566144 • 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: Cost Cost Formula Cost of good sold $26 per unit sold Advertising expense $183,000 per quarter Sales commissions 7% of sales Shipping expense ? Administrative salaries $93,000 per quarter Insurance expense $10,300 per quarter Depreciation expense $63,000 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 Units Sold Shipping Expense Year 1: First 29,000 $ 173,000 Second 31,000 $ 188,000 Third 36,000 $ 230,000 Fourth 32,000 $ 193,000 Year 2: First 30,000 $ 183,000 Second 33,000 $ 198,000 Third 47,000 $ 245,000 Fourth 44,000 $ 221,000 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 the
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: Cost Cost Formula Cost of good sold $26 per unit sold Advertising expense $183,000 per quarter Sales commissions 7% of sales Shipping expense ? Administrative salaries $93,000 per quarter Insurance expense $10,300 per quarter Depreciation expense $63,000 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 Units Sold Shipping Expense Year 1: First 29,000 $ 173,000 Second 31,000 $ 188,000 Third 36,000 $ 230,000 Fourth 32,000 $ 193,000 Year 2: First 30,000 $ 183,000 Second 33,000 $ 198,000 Third 47,000 $ 245,000 Fourth 44,000 $ 221,000 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 the
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: Cost Cost Formula Cost of good sold $26 per unit sold Advertising expense $183,000 per quarter Sales commissions 7% of sales Shipping expense ? Administrative salaries $93,000 per quarter Insurance expense $10,300 per quarter Depreciation expense $63,000 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 Units Sold Shipping Expense Year 1: First 29,000 $ 173,000 Second 31,000 $ 188,000 Third 36,000 $ 230,000 Fourth 32,000 $ 193,000 Year 2: First 30,000 $ 183,000 Second 33,000 $ 198,000 Third 47,000 $ 245,000 Fourth 44,000 $ 221,000 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 the
Explanation / Answer
Milden Company High Low activity level shipping expenses Units Sold Shipping Expenses High Activity level 47000 $245,000.00 Low Activity level 29000 $173,000.00 Difference 18000 $ 72,000.00 Variable=($72000/18000)= $ 4.00 Fixed Cost element Total shipping expenses at high activity level $245,000.00 Less: Variable Cost=(Variable cost per unit* High activity unit sold)=4*47000= $188,000.00 Fixed Cost element=($245000-$57000) $ 57,000.00 1) Cost equation=$57000+$4*X X=Number of Units sold