Question

McKenzie Company has decided to use a contribution format income statement for internal planning purposes. The company has analyzed its expenses and has developed the following cost formulas:

Cost	Cost Formula
Cost of goods sold	$31 per unit sold
Advertising expense	$187,000 per quarter
Sales commissions	7% of sales
Administrative salaries	$97,000 per quarter
Shipping expense	?
Depreciation expense	$67,000 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 are given below:

Quarter	Units Sold		Shipping Expense
Year 1:
First	33,000	$	177,000
Second	35,000	$	192,000
Third	40,000	$	234,000
Fourth	36,000	$	197,000
Year 2:
First	34,000	$	187,000
Second	37,000	$	202,000
Third	48,750	$	240,000
Fourth	45,750	$	216,000

     Management 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 43,000 units at a selling price of $60 per unit. Prepare a contribution format income statement for the quarter.

Answer 1

1
	Units Sold	Shipping Expense
High level	48750	240000
Low level	33000	177000
Change	15750	63000
Unit variable cost = 63000/15750 = $4
Fixed cost = 240000-(48750*4)= $45000
Y = $45000+$4X
2
Budgeted Income Statement
For the first quarter of Year 3
Sales		2580000	=43000*60
Variable expenses:
Cost of goods sold	1333000		=43000*31
Shipping expense	172000		=43000*4
Sales commissions	180600		=43000*60*7%
Total Variable expenses		1685600
Contribution margin		894400
Fixed expenses:
Advertising expense	187000
Depreciation expense	67000
Administrative salaries	97000
Shipping expense	45000
Total Fixed expenses		396000
Net operating income		498400