Question

Milden Company is a distributor who wants to start using a contribution format income statement for planning purposes. The company has analyzed its expenses and developed the following cost formulas: Cost Cost FormulaCost of good sold $28 per unit soldAdvertising expense $185,000 per quarterSales commissions 6% of salesShipping expense ?Administrative salaries $95,000 per quarterInsurance expense $10,500 per quarterDepreciation expense $65,000 per quarter Because shipping expense is a mixed cost, the company needs to estimate the variable shipping expense per unit sold and the fixed shipping expense per quarter using the following data: Quarter Units Sold ShippingExpenseYear 1: First 31,000 $ 175,000 Second 33,000 $ 190,000 Third 38,000 $ 232,000 Fourth 34,000 $ 195,000 Year 2: First 32,000 $ 185,000 Second 35,000 $ 200,000 Third 49,000 $ 247,000 Fourth 46,000 $ 223,000 Required:1. Using the high-low method, estimate a cost formula for shipping expense in the form Y = a + bX.2. In the first quarter of Year 3, the company plans to sell 39,000 units at a selling price of $55 per unit. Prepare a contribution format income statement for the quarter.

Answer 1

. Using the high-low method, estimate a cost formula for shipping expense in the form Y = a + bX.2.

Variable cost per unit= Change in cost/Change in unit

= (247000-175000)/(49000-31000)

Variable cost per unit = 4 per unit

Fixed cost = 247000-(49000*4) = 51000

Prepare contribution margin income statement :

Sales (39000*55)		2145000
Less:Variable expense
Cost of goods sold (39000*28)	1092000
Sales commission (2145000*6%)	128700
Shipping expense (39000*4)	156000
Total variable expense		1376700
Contribution margin		768300
Fixed expense
Advertising expense	185000
Shipping expense	51000
Administrative expense	95000
Insurance expense	10500
Depreciation expense	65000
Total fixed expense		406500
Net operating income		361800