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Question : I need help with this question and can explained how you get the fixed cost element from the high - low activity level
Question: I need help with this question and can explained how you get the fixed cost element from the high - low activity level : Mi...
I need help with this question an instructions: 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 contirbution formant income statement. To have data to prepare such a staement, the company has analyzed its expenses and has developed the following cost formulas:
cost Cost Formula
cost of good sold $20 per unit sold
advertising expense $170,000 per quarter
sales commissions 5% of sales
shipping expense ?
administrative salaries $80,000 per quarter
insurance expense $9,000 per quarter
Depreciation expense $50,000 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:
shipping
Quarter Unit Sold expense
Year 1:
first 16,000 $160,000
Second 18,000 $175,000
third 23,000 $217,000
fourth 19,000 $180,00
Year 2:
First 17,000 $170,000
Second 20,000 $185,000
Third 25,000 $232,000
Fourth 22,000 $208,000
Milden Company's president would like a cost formula derived for shipping expense so that a budgeted contribution format income ststement 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.
unit sold shipping expense
high activity level 25,000 $ 232,000
low activity level 16,000 $ 160,000
Change 9,000 $ 72,000
Variable cost per unit $ 8 per unit
Fixed cost element
Y= + $ 8 X
2. In the first quarter of Year 3, the company plans to sell 21,000 units at a selling price of $50 per unit. Prepare a contribution formant income statement for the quarter. (Do not round your intermediate calculations.)
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