Milden Company has an exclusive franchise to purchase a product from the manufac
ID: 2603361 • 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 of good sold Advertising expense Sales commissions Shipping expense Administrative salaries Insurance expense Depreciation expense Cost Formula $27 per unit sold $184,000 per quarter 7% of sales $94,000 per quarter $10,400 per quarter $64,000 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 30,000 $174,000 32,000 $189,000 37,000 $231,000 33,000 $194,000 Year 2 First Second Third Fourth 31,000 $184,000 34,000 $199,000 44,400 $246,000 41,400 $222,000 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 quarterExplanation / Answer
Answer
High Activity level is the level when we sold the Maximum no. of Units i.e. 3rd Quarter of 2nd Year (44,400 Units)
Low Activity Level is the level when we sold the minimum no. of units i.e. 1st Quarter of 1st Year (30,000 Units)
Units Sold
Shipping Expenses
High Activity Level
44,400
246,000
Low Activity Level
30,000
174,000
Change
14,400
72,000
Variable Cost per unit
5
Per unit
Fixed Cost element
24,000
We know that Variable Cost changes with units, so
Variable cost = Change in Shipping Expenses / Change in Units
= $72,000 / 14,400 Units
Variable cost = $5 Per Unit
We know that Fixed cost will remain same irrespective of the no. of Units produced, so we will calculate Fixed cost when selling 30,000 Units
Total Cost = Variable Cost + Fixed Cost
Fixed Cost = Total Cost – Variable Cost
= 174,000 – ($5 per unit * 30,000 Units)
Fixed Cost = $24,000
Cost Formula
Cost = Fixed Expenses + (Variable cost p.u. * No. of Units)
Cost = $24,000 + ($5 p.u. * No. of Units)
Units Sold
Shipping Expenses
High Activity Level
44,400
246,000
Low Activity Level
30,000
174,000
Change
14,400
72,000
Variable Cost per unit
5
Per unit
Fixed Cost element
24,000