High-Low Method; Contribution format income statement
Alden 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 $20 per unit sold
Advertising expense $170,000 per quarter
Sales commission 5% of sales
Administrative expense 80,000 per quarter
Shipping expense ?
Depreciation expense 50,000 per quarter
Management has concluded that shipping expense is a mixed cost, containing both variable and fixed cost elements.
Units sold and the remaining shipping expense over the last 8 quarters are given below:
Quarter Units Sold Shipping Expense
Year1:
First 16000 160000
Second 18000 175000
Third 23000 217000
Fourth 19000 180000
Year2:
First 17000 170000
Second 20000 185000
Third 25000 232000
Fourth 22000 208000
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.
1. Using the high-low method, estimate a cost formula for shipping expense.
2. In the first quarter of year 3, the company plans to sell 21,000 units at the selling price of $50 per unit.
Prepare a Contribution Format Income Statement for the quarter.