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 of goods sold $20 per unit sold
- advertising expense $170000 per quarter
- sales commissions 5% of sales
- Administrative salaries $80000 per quarter
- shipping expense ?
- Depreciation expense $50000 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:
Year 1
- First 16000 units sold $160000 shipping expense
- second 18000 units sold $175000 shipping expense
- third 23000 units sold $217000 shipping expense
- fourth 19000 units sold $180000 shipping expense
Year 2
- First 17000 units sold $170000 shipping expense
- second 20000 units sold $185000 shipping expense
- third 25000 units sold $232000 shipping expense
- fourth 22000 units sold $208000 shipping expense
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:
Using the high-low method, estimate a cost formula for shipping expense.
In the first quarter of Year 3, the company plans to sell 21000 units at a selling price of $50 per unit. Prepare a contribution format income statement for the quarter.