Milden Company has an exclusive franchise to purchase a product from the manufac
ID: 341599 • 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 quarterExplanation / Answer
Answer
Quarter
Units sold
Shipping expense
A
High Level
Third (Year 2)
46400
$248000
B
Low Level
First (Year 1)
32000
$176000
C=A-B
Difference
14400
$72000
A
Difference in Shipping expense
$72000
B
Difference in Units sold
14400
C=A/B
Variable cost per unit sold
$5 per unit
Quarter
Units sold (A)
variable cost per unit (B)
Total variable shipping expense (C=AxB)
Total shipping expense (given) (D)
Total fixed shipping expense (d-C)
High Level
Third (Year 2)
46400
5
232000
248000
16000
Low Level
First (Year 1)
32000
5
160000
176000
16000
Hence cost equation—Total shipping expense = variable expense + shipping expense
Y = a + bx
x=Units sold
Shipping expense (Y) = $16000 (fixed expense ‘a’) + $5(Variable expense per unit) ‘x’
Y=16000 + 5x
Units
per unit
Total
Sales Revenue
41000
$ 59.00
$ 2419000.00
Variable expense:
Cost of Goods Sold
41000
$ 30.00
$ 1230000.00
Sales Commission
41000
$ 4.72
$ 193520.00
Variable shipping expense
41000
$ 5.00
$ 205000.00
Total Variable expense
41000
$ 39.72
$ 1628520.00
Contribution Margin
41000
$ 19.28
$ 790480.00
Fixed expenses:
Advertising expense
$ 186000.00
Administrative salaries
$ 96000.00
Insurance expense
$ 10600.00
Depreciation expense
$ 66000.00
Fixed shipping expense
$ 16000.00
Total fixed expense
$ 374,600.00
Net Income
$ 415,880.00
Quarter
Units sold
Shipping expense
A
High Level
Third (Year 2)
46400
$248000
B
Low Level
First (Year 1)
32000
$176000
C=A-B
Difference
14400
$72000