Childress Company has an exclusive franchise to purchase a product from the manu

Question

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

Explanation / Answer

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

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