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 $33 per unit sold
Advertising expense $189,000 per quarter
Sales commissions 8% of sales
Administrative salaries $99,000 per quarter
Shipping expense ?
Depreciation expense $69,000 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 is given below:
Quarter Units Sold Shipping Expense
First 35,000 $179,000
Second 37,000 $194,000
Third 42,000 $236,000
Fourth 38,000 $199,000
First 36,000 $189,000
Second 39,000 $204,000
Third 53,000 $251,000
Fourth 50,000 $227,000
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.
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 41,000 units at a selling price of $66 per unit. Prepare a contribution format income statement for the quarter.