Reference no: EM131914684

Problem

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	$22 per unit sold
Advertising expense	$172,000 per quarter
Sales commissions	5% of sales
Shipping expense	?
Administrative salaries	$82,000 per quarter
Insurance expense	$9,200 per quarter
Depreciation expense	$52,000 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	18,000	162,000
Second	20,000	177,000
Third	25,000	219,000
Fourth	21,000	182,000
Year 2:
First	19,000	172,000
Second	22,000	187,000
Third	30,000	234,000
Fourth	27,000	210,000

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.

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 25,000 units at a selling price of $52 per unit. Prepare a contribution format income statement for the quarter.