Problem: Conor Company has decided to use the contribution approach to the income statement internally for planning purposes.The company has analyzed its expenses and developed the following cost formulas:
Cost Cost Formula
Cost of goods sold $ 25 per unit sold
Advertising expense $190,000 per quarter
Sales Commissions $ 6% of sales
Administrative salaries $ 100,000 per quarter
Shipping expense
Depreciation expense $ 75,000 per quarter
Management has concluded that shipping expense is a mixed cost,containing both variable and fixed cost elements.Units sold and the related shipping expense over the last eight quarters are given below:
Quarter Units Sold Shipping Expense
Year 1:
First 20,000 190,000
Second 22,000 205,000
Third 27,000 240,000
Fourth 23,000 220,000
Year 2:
First 21,000 200,000
Second 24,000 220,000
Third 29,000 260,000
Fourth 26,000 235,000
Management would like a cost formula derived for shipping expense so that a budgeted income statement using the contribution approach can be prepared for the next quarter.
In the first quarter of year 3, the company plans to sell 25,000 units at a selling price of $ 60 per unit. Prepare an income statement for the quarter using the contribution format.