Kindly provide a detailed explanation to the following quest

Kindly provide a detailed explanation to the following question. So i can understand and solve on my own

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 of goods sold $35 per unit sold Advertising expense $10,000 per quarter Sales commissions 6% of sales Shipping expenses $145,000 per quarter Administrative salaries $9,000 per quarter Insurance expense $76,000 per quarter Depreciation expense

Management has conducted that shipping expense is mixed cost, containing both variable and fixed cost elements. Units sold and the related shipping expense over the last quarters follows: Quarter Units sold Shipping expense Year 1: 10,000 $113,000 First 16,000 $175,000 Second 18,000 $190,000 Third 15,000 $164,000 Year 2: First 11,000 $130,000 Second 17,000 $185,000 Third 20,000 $210,000 Fourth 13,000 $147,000 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 derived for shipping expense. 2. In the first quarter of Year 3, the company plans to sell 12,000 units at a selling price of $100 per unit. Prepare a contribution format income statement for the quarter.

Solution

Answer 1

Y=$16000+$9.7X

Working note:

Variable cost per unit =Change in cost/Change in activity

=(210000-113000)/(20000-10000)

=$9.7per unit

Calculation of fixed cost

Total shipping expense athigh activity level=210000

less: variable cost(20000*9.7)=194000

Fixed cost=16000

Answer 2