This situation involves a cost analysis problem. Cheerful Company has a franchise to purchase unique products from toy manufacturers and distribute them on the retail level. As a planning aid, 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

Cost of good sold.................................... $35 per unit sold

Advertising expense................................. $210,000 per quarter

Sales commissions................................... 6% of sales

Shipping expense.................................... ?

Administrative salaries.................................. $145,000 per quarter

Insurance expense........................................ $9,000 per quarter

Depreciation expense........................................ $76,000 per quarter

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

Cheerful Companys 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.

Quarter

Year 1: Units Sold Shipping Expense

First...........................................10,000 $119,000

Second........................................$16,000 $175,000

Third...........................................$18,000 $190,000

Fourth..........................................$15,000 $164,000

Year 2:

First.......................................11,000 $130,000

Second...................................17,000 $185,000

Third........................................20,000 $210,000

Fourth....................................13,000 $147,000

Cheerful Companys 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.