Reference no: EM131913139

Problem

McKenzie Company has decided to use a contribution format income statement for internal planning purposes. The company has analyzed its expenses and has developed the following cost formulas:

Cost	Cost Formula
Cost of goods sold	$27 per unit sold
Advertising expense	$184,000 per quarter
Sales commissions	7% of sales
Administrative salaries	$94,000 per quarter
Shipping expense	?
Depreciation expense	$64,000 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 are given below:

Quarter	Units Sold	Shipping Expense
Year 1:
First	30,000	174,000
Second	32,000	189,000
Third	37,000	231,000
Fourth	33,000	194,000
Year 2:
First	31,000	184,000
Second	34,000	199,000
Third	44,400	246,000
Fourth	41,400	222,000

Management 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 37,000 units at a selling price of $55 per unit. Prepare a contribution format income statement for the quarter.