The Accounting Department of Archer Company, a Merchandising Company, Has

question 56

Essay

The accounting department of Archer Company, a merchandising company, has prepared the following analysis:
$$\begin{array} { l l } { \text { Cost } } & { \text { Cost Formula } } \\\text { Cost of goods sold } & \$ 56 \text { per unit } \\\text { Sales commissions } & 12 \% \text { of sales } \\\text { Advertising expense } & \$ 300,000 \text { per month } \\\text { Administrative salaries } & \$ 160,000 \text { per month } \\\text { Billing expense } & ? \\\text { Depreciation expense } & \$ 62,000 \text { per month }\end{array}$$ The accounting department feels that billing expense is a mixed cost, containing both fixed and variable cost elements. The billing expenses and sales in units over the last several months follow:
$\begin{array}{lcc}& \begin{array}{c}\text { Units Sold } \\\text { (thousands) }\end{array} & \begin{array}{c}\text { Billing } \\\text { Expense }\end{array} \\\text { January } & 9 & \$ 30,000 \\\text { February } & 11 & \$ 33,000 \\\text { March } & 14 & \$ 36,000 \\\text { April } & 17 & \$ 42,000 \\\text { May } & 15 & \$ 39,000 \\\text { June } & 12 & \$ 35,000\end{array}$ The accounting department now plans to develop a cost formula for billing expense so that a contribution format income statement can be prepared for management's use.
Required:
a. Using the least-squares method, estimate the cost formula for billing expense. Round off both the fixed cost and the variable cost per thousand units sold to the nearest whole dollar.
b. Assume that the company plans to sell 30,000 units during July at a selling price of $100 per unit. Prepare a budgeted income statement for the month, using the contribution format.

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Definitions:

Rolling Two Dice

An activity involving the simultaneous casting of two dice, used in probability studies to illustrate outcomes and calculate odds of specific events.

Colorado Rockies

A professional baseball team based in Denver, Colorado, part of Major League Baseball's National League West division.

Mutually Exclusive

A condition where two events cannot both occur at the same time; the occurrence of one event excludes the possibility of the other.

Simultaneously

Occurring, operating, or done at the same time.