High Low Contribution Margin Format Alden Company has decid

(High Low / Contribution Margin Format) Alden Company has decided to use a contribution approach income statement for internal planning purposes. The company has analyzed its expenses and has developed the following cost formulas: 8. Cost Cost of goods sold... Advertising expenses... Sales commissions Cost Formula $170,000 per quarter $80,000 per quarter 5% of sales Administrative salaries. 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: Units Sold Shipping Expense Quarter Year 1: Second (000) 16 18 23 19 $160,000 $175.000 $210,000 $180,000 Year 2 First. 17 20 25 $170,000 $190,000 $230,000 $205,000 Management would like a cost formula derived for shipping expense so that a budgeted income statement using the contribution approach can be prepared for the next quarter Required 1. Using the high-low method, estimate a cost formula for shipping expense. (Since the Units Sold above are in thousands of units, the variable cost you compute will also be in thousands of units. It can be left in this form, or you can convert your variable cost to a per unit basis by dividing it by 1,000.) 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 format income statement for the quarter.

Solution

1)

2. Income Statement under the contribution format :

	Units	Shipping costs	Variable cost per unit	Shipping Fixed cost per quarter
High	25000	230000
Low	16000	160000
Difference	9000	$70000	70000/9000 = $7.78/unit	$160000 - (16000*$7.78) = $35520