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 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.

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