Entertainment Enterprises, a firm that sells magazine subscriptions, is experiencing increased competition from a number of companies. The president, Betty Kincher, has asked you, the controller, to prepare an income statement that will highlight the fixed and variable costs; this will provide more useful information for planning and control purposes. Sales revenues are $\$ 25$ per subscription. An analysis of company costs for the past six months reveals the following:

Administrative salaries $\$ 10,000$ per month Advertising expense

$\$ 2,000$ per month Cost of goods sold

$\$ 12.50$ per subscription Rent expense. $\$ 5,000$ per month Sales commissions $15 \%$ of sales In addition, the company makes most sales contacts through an extensive telephone network. Consequently, the telephone expense is significant and has both fixed and variable components. Relevant data concerning the telephone expense for the past six months follow:

Prepare a management report for the president that:
1. Computes the fixed and variable portions of the telephone expense using the highlow method. (Note: A scattergraph may be used to visually check your answer.)
2. Identifies the total variable and fixed costs for the past six months for Entertainment Enterprises.
3. Presents a budgeted (pro-forma) contribution margin income statement for Entertainment Enterprises for the next six months (January through June), assuming that it expects to sell 30,000 subscriptions at a price of $\$ 25$ each.
4. Explains how the information provided in (3) might help the president make better management decisions.

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Month Unit Sales Telephone Expense July 4,000 $10,200 August 5,000 12,300 September 3,500 9,150 October 4,500 11,250 November 5,200 12,720 December 5,500 13,350