Question

Problem 2-23 High-Low Method; Contribution Format Income Statement [LO2-5, LO2-6]

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	$24 per unit sold
Advertising expense	$174,000 per quarter
Sales commissions	8% of sales
Shipping expense	?
Administrative salaries	$84,000 per quarter
Insurance expense	$9,400 per quarter
Depreciation expense	$54,000 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	20,000	$	164,000
Second	22,000	$	179,000
Third	27,000	$	221,000
Fourth	23,000	$	184,000
Year 2:
First	21,000	$	174,000
Second	24,000	$	189,000
Third	38,000	$	236,000
Fourth	35,000	$	212,000

     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.

        

        

2.	In the first quarter of Year 3, the company plans to sell 29,000 units at a selling price of $54 per unit. Prepare a contribution format income statement for the quarter. (Do not round your intermediate calculations.)

       

Garrison 15e Recheck 2014-12-16

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Answer 1

1.

High low method (shipping expense)  = $236,000 - 164,000 / 38,000 - 20,000

Variable cost per unit = $72,000 / 18,000 = $4 per unit

Fixed cost = $236,000 - $152,000 (38,000*$4) = $84,000

2.

MILDEN COMPANY Contribution Format Income Statement
Sales (29,000*$54)		$1,566,000
Variable costs:
Cost of goods sold (29,000*$24)	696,000
Shipping expense (29,000*$4)	116,000
Sales commission ($1,566,000*8%)	125,280
Total variable costs		937,280
Contribution margin		628,720
Fixed costs:
Advertising expense	174,000
Shipping expense	84,000
Administrative salaries	84,000
Insurance expense	9,400
Depreciation expense	54,000
Total fixed costs		405,400
Net income		$223,320