Question
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,
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 | $22 per unit sold | |
Advertising expense | $172,000 per quarter | |
Sales commissions | 5% of sales | |
Shipping expense | ? | |
Administrative salaries | $82,000 per quarter | |
Insurance expense | $9,200 per quarter | |
Depreciation expense | $52,000 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 | 18,000 | $ | 162,000 | |
Second | 20,000 | $ | 177,000 | |
Third | 25,000 | $ | 219,000 | |
Fourth | 21,000 | $ | 182,000 | |
Year 2: | ||||
First | 19,000 | $ | 172,000 | |
Second | 22,000 | $ | 187,000 | |
Third | 30,000 | $ | 234,000 | |
Fourth | 27,000 | $ | 210,000 | |
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. |
2. | In the first quarter of Year 3, the company plans to sell 25,000 units at a selling price of $52 per unit. Prepare a contribution format income statement for the quarter. (Do not round your intermediate calculations.) |
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