Question

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 $27 per unit sold Advertising expense $184,000 per quarter Sales commissions 7% of sales Shipping expense ? Administrative salaries $94,000 per quarter Insurance expense $10,400 per quarter Depreciation expense $64,000 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 30,000 $ 174,000 Second 32,000 $ 189,000 Third 37,000 $ 231,000 Fourth 33,000 $ 194,000 Year 2: First 31,000 $ 184,000 Second 34,000 $ 199,000 Third 44,400 $ 246,000 Fourth 41,400 $ 222,000

Answer 1

Answer:

Fixed Cost = $24,000 Variable cost = $5

Explanation:

You have to use the High-Low method

$Shipping expense = units sold * variable cost + fixed cost$

From the table you got, you pick the higher and the lowest unit sold

and calculate the diference between them:

$\left[\begin{array}{ccc}& Units& Shipping Expense\\ High&44,400&246,000\\ Low&30,000&174,000\\ Diference&14,400&72,000\\\end{array}\right]$

Now 14,400 Units generates a cost of 72,000 Dividing we get the variable component

$72,000/14,400 = 5$

Then we calculate for the fixed cost:

$246,000 = 44,400 * 5 + Fixed Cost$

Fixed Cost = 24,000