Childress Company has an exclusive franchise to purchase a p

Childress 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:

Management has provided you data for units sold and the related shipping expense over the last eight quarters as follows:

Childress Company’s president 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:
1. Select an approach and estimate a cost formula for shipping expense. Be sure to explain the approach you selected.

2. In the first quarter of Year 3, the company plans to sell 12,000 units at a selling price of $100 per unit. Prepare a contribution format income statement for the quarter.

Cost Cost Formula $35 per unit sold 6% of sales Advertising expense . . . . . $210,000 per quarter Shipping expense . Administrative salaries . . . . .. $145,000 per quarter Insurance expense $9,000 per quarter Depreciation expense . . . . .. .$76,000 per quarter

Solution

1. The approach used here to calculate here is taking the average, by adding all the shipping expenses and divided by the number of units sold in last 8 quarters. The resultant figure can be taken as shipping expense.

2.

Quarter	Units Sold	Shipping Expenses
Year 1
1	10000	$    1,19,000.00
2	16000	$    1,75,000.00
3	18000	$    1,90,000.00
4	15000	$    1,64,000.00
	59000	$    6,48,000.00
Year 2
1	11000	$    1,30,000.00
2	17000	$    1,85,000.00
3	20000	$    2,10,000.00
4	13000	$    1,47,000.00
	61000	$    6,72,000.00
Total	120000	$ 13,20,000.00	$     11.00
	a	b	a/b