hw ch 2.5

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	$27 per unit sold
Advertising expense	$177,000 per quarter
Sales commissions	6% of sales
Shipping expense	?
Administrative salaries	$87,000 per quarter
Insurance expense	$9,700 per quarter
Depreciation expense	$57,000 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	23,000	$	167,000
Second	25,000	$	182,000
Third	30,000	$	224,000
Fourth	26,000	$	187,000
Year 2:
First	24,000	$	177,000
Second	27,000	$	192,000
Third	42,250	$	244,000
Fourth	39,250	$	220,000

Milden Companys 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.