Milden Company has an exclusive franchise to purchase a prod

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 of good sold Advertising expense Sales commissions Shipping expense Administrative salaries Insurance expense Depreciation expense Cost Formula $32 per unit sold $188,000 per quarter 8% of sales $98,000 per quarter $10,800 per quarter $68,000 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 Units Sold Expense Quarter Year 1 First Second Third Fourth 34,000 $178,000 36,000 $193,000 41,000 $235,000 37,000 $198,000 Year 2 First Second Third Fourth 35,000 $188,000 38,000 $203,000 52,000 $250,000 49,000 $226,000 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

Solution

1) units Shipping Sold expense High activity level 52,000 250,000 low activity level 34,000 178,000 change 18,000 72,000 Variable cost per unit 4 per unit Fixed cost element 42000 Variable cost per unit = 72000/18000 = $4 per unit Fixed cost element     = 250,000-(52000*4)= 42000 Y= 42,000 + 4 X 2)                                        Milden Company Budgeted Contribution Format Income Statement For the First Quarter , year 3 Sales 39000*65) 2535000 Variable expenses: Cost of goods sold (39000*32) 1248000 Sales commission (39000*65*8%) 202800 Shipping expense (39000*4) 156000 total variable expense 1606800 Contribution margin 928200 Fixed expenses Advertising expense 188,000 Shipping expense 42,000 Administrative salaries 98,000 insurance expense 10,800 Depreciation expense 68,000 total fixed expense 406,800 Net income 521,400