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Management has concluded that shipping expense

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Reference no: EM131812812

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    $34 per unit sold
  Advertising expense    $190,000 per quarter
  Sales commissions    7% of sales
  Shipping expense    ?
  Administrative salaries    $100,000 per quarter
  Insurance expense    $11,000 per quarter
  Depreciation expense    $70,000 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 36,000      $ 180,000
      Second 38,000      $ 195,000
      Third 43,000      $ 237,000
      Fourth 39,000      $ 200,000
  Year 2:      
      First 37,000      $ 190,000
      Second 40,000      $ 205,000
      Third 54,000      $ 252,000
      Fourth 51,000      $ 228,000

Milden Company's 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 43,000 units at a selling price of $67 per unit. Prepare a contribution format income statement for the quarter. (Do not round your intermediate calculations.)

Reference no: EM131812812

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