Milden Company has an exclusive franchise to purchase a productfrom the manufacturer and distribute it on the retail level. As anaid in planning, the company has decided to start using acontribution format income statement. To have data to prepare sucha statement, the company has analyzed its expenses and hasdeveloped the following cost formulas:
Cost
CostFormula
Cost of goodsold
$30 per unitsold
Advertisingexpense
$180,000 perquarter
Salescommissions
7% ofsales
Shippingexpense
?
Administrativesalaries
$90,000 perquarter
Insuranceexpense
$10,000 perquarter
Depreciationexpense
$60,000 perquarter
Management has concluded that shipping expense is a mixed cost,containing both variable and fixed cost elements. Units sold andthe related shipping expense over the last eight quartersfollow:
Quarter
Units Sold
ShippingExpense
Year 1:
First
26,000
$
170,000
Second
28,000
$
185,000
Third
33,000
$
227,000
Fourth
29,000
$
190,000
Year 2:
First
27,000
$
180,000
Second
30,000
$
195,000
Third
40,400
$
242,000
Fourth
37,400
$
218,000
Milden Company’s president would like a cost formula derived forshipping expense so that a budgeted contribution format incomestatement can be prepared for the next quarter.
Required:
1. Using the high-low method, estimate a cost formula forshipping expense based on the data for the last eight quartersabove.
Shipping
Units Sold
Expense
High activity level
Low activity level
Change
0
$0
Variable cost per unit
per unit
Fixed cost element
Y =
+
X
2. In the first quarter of Year 3, the company plans to sell35,000 units at a selling price of $60 per unit. Prepare acontribution format income statement for the quarter. (Donot round your intermediate calculations.)
Milden Company
Budgeted Contribution FormatIncome Statement
For the First Quarter, Year3
Variable expenses:
Total variable expenses
0
0
Fixed expenses:
Total fixed expenses
0
$0
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