Chapter 2, Problem 23P

To determine

Mixed cost: Mixed cost is a cost that includes both the fixed cost and the variable cost. It represents the total cost of the activity or production.

Variable Cost: Variable cost is a cost that changes when the volume of production changes, in the same direction and in the same proportion.

Fixed Cost: Fixed cost is a cost that remains constant irrespective of changes in the production volume.

High-low method: High-low method is a method of calculating the variable cost and the fixed cost of a product or service. The calculation of this method is based on the total production/activity cost and the lowest production/activity cost the product during any period.

Income Statement: Income statement is a financial statement that shows the net income or loss for a particular period. It is the summary of expenses and income of a particular period.

Contribution approach Income Statement: Income statement under the contribution approach is prepared based on the variable and fixed costs. First, the variable expenses are deducted to obtain the contribution margin, and then the fixed expenses are deducted to obtain the net operating income.

1. Using the high-low method, estimate a cost formula for the shipping expense.
2. Prepare a contribution format income statement for the first quarter of year 3.