Question

Water Valley Company
Comparative Income Statement
For the Second Quarter
	April	May	June
Sales in units	4,500	5,250	6,000
Sales Revenue	$630,000	$735,000	$840,000
Cost of goods sold	$252,000	$294,000	$336,000
Gross margin	$378,000	$441,000	$504,000
Selling and administrative expenses:
Shipping expense	$56,000	$63,500	$71,000
Advertising expense	$70,000	$70,000	$70,000
Salaries and commisions	$143,000	$161,500	$180,500
Insurance expense	$9,000	$9,000	$9,000
Depreciation expense	$42,000	$42,000	$42,000
Total selling and administrative expense	$320,000	$346,250	$372,500
Net operating income	$58,000	$94,750	$131,500

Using the high-low method, determine the cost function for shipping expenses.

		y = 11,000 + 10X
		y = 30,500 + 25X
		y = 19,500 + 15X
		y = 41,500 + 81X

Answer 1

	Sales in units	Shipping Expense
High level	6000	$                    71,000
Low level	4500	$                    56,000
Change	1500	$                    15,000

Variable cost per unit = $15000/1500 = $10

Fixed cost (at high level) = $71000 - (6000 x $10) = $71000 - $60000 = $11000

Fixed cost (at low level) = $56000 - (4500 x $10) = $56000 - $45000 = $11000

Cost function for shipping expense: y = $11000 + $10X

Answer: y = 11,000 + 10X