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
First 16000 160000
Second 18000 175000
Third 23000 217000
Fourth 19000 180000
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.