Milden Company has an exclusive franchise to purchase a product from the manufac
ID: 341593 • 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 $30 per unit sold $186,000 per quarter 8% of sales $96,000 per quarter $10,600 per quarter $66,000 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 32,000 $176,000 34,000 $191,000 39,000 $233,000 35,000 $196,000 Year 2 First Second Third Fourth 33,000 $186,000 36,000 $201,000 46,400 $248,000 43,400 $224,000 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 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 unitExplanation / Answer
Units Sold
Shipping Expense
High Activity Level
46,400
$ 248,000
Low Activity Level
32,000
$ 176,000
Change
14,400
$ 72,000
Variable Cost Per Unit
5.00
Per Unit
Fixed Cost Element
$ 16,000
Working Notes:
Variable Cost per Unit= Difference between Total Cost at high and low activity level/Difference between unit at high and low activity
= $ 248,000 - $ 176,000/(46,400-32,000)
= $ 72,000/14,400
= $ 5.00
Fixed Cost = Total Cost – Variable Cost
= $ 248,000 - (46,400 x $ 5.00)
= $ 248,000 - $ 232,000
= $ 16,000
Y= a + b X
a = fixed cost
b = variable cost per unit
x = no. of units sold
Units Sold
Shipping Expense
High Activity Level
46,400
$ 248,000
Low Activity Level
32,000
$ 176,000
Change
14,400
$ 72,000
Variable Cost Per Unit
5.00
Per Unit
Fixed Cost Element
$ 16,000