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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
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 Formula Cost Cost of goods sold $26 per unit sold $183,000 per quarter Advertising expense Sales commissions 7% of sales $93,000 per quarter Administrative salaries Shipping expense $63,000 per quarter Depreciation expense 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: Shipping Quarter Units Sold Expense Year 1: 29,000 173,000 First 31,000 188,000 Second 36,000 230,000 Third 32,000 193,000 Fourth Year 2: 30,000 183,000 First 33,000 198,000 Second 47,000 245,000 Third 44,000 221,000 Fourth 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
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