Milden Company is a distributor who wants to start using a contribution format income statement for planning purposes. The company has analyzed its expenses and developed the following cost formulas: Cost Cost Formula Cost of good sold $28 per unit sold Advertising expense $178,000 per quarter Sales commissions 6% of sales Shipping expense ? Administrative salaries $88,000 per quarter Insurance expense $9,800 per quarter Depreciation expense $58,000 per quarter Because shipping expense is a mixed cost, the company needs to estimate the variable shipping expense per unit sold and the fixed shipping expense per quarter using the following data: Quarter Units Sold Shipping Expense Year 1: First 24,000 $ 168,000 Second 26,000 $ 183,000 Third 31,000 $ 225,000 Fourth 27,000 $ 188,000 Year 2: First 25,000 $ 178,000 Second 28,000 $ 193,000 Third 38,400 $ 240,000 Fourth 35,400 $ 216,000 Required: 1. Using the high-low method, estimate a cost formula for shipping expense in the form Y = a + bX. 2. In the first quarter of Year 3, the company plans to sell 31,000 units at a selling price of $58 per unit. Prepare a contribution format income statement for the quarter.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Milden Company is a distributor who wants to start using a contribution format income statement for planning purposes. The company has analyzed its expenses and developed the following cost formulas:
| Cost | Cost Formula |
| Cost of good sold | $28 per unit sold |
| Advertising expense | $178,000 per quarter |
| Sales commissions | 6% of sales |
| Shipping expense | ? |
| Administrative salaries | $88,000 per quarter |
| Insurance expense | $9,800 per quarter |
| $58,000 per quarter | |
Because shipping expense is a mixed cost, the company needs to estimate the variable shipping expense per unit sold and the fixed shipping expense per quarter using the following data:
| Quarter | Units Sold | Shipping Expense |
||
| Year 1: | ||||
| First | 24,000 | $ | 168,000 | |
| Second | 26,000 | $ | 183,000 | |
| Third | 31,000 | $ | 225,000 | |
| Fourth | 27,000 | $ | 188,000 | |
| Year 2: | ||||
| First | 25,000 | $ | 178,000 | |
| Second | 28,000 | $ | 193,000 | |
| Third | 38,400 | $ | 240,000 | |
| Fourth | 35,400 | $ | 216,000 | |
Required:
1. Using the high-low method, estimate a cost formula for shipping expense in the form Y = a + bX.
2. In the first quarter of Year 3, the company plans to sell 31,000 units at a selling price of $58 per unit. Prepare a contribution format income statement for the quarter.
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