The management team at Stirling Company decided that it would be more informative if their costs were separated into fixed...

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The management team at Stirling Company decided that it would be more informative if their costs were separated into fixed and variable categories. Accordingly, the accounting department has made the following analysis:

 

COST                                                COST FORMULA                Fixed Variable or Mixed?

Cost of goods sold                  $40 per unit                           

Advertising                             $70,000 per year                    

Sales commissions                  8.5% of sales revenue                        

Administrative salaries           $160,000 per year                  

Clerical expense                                  ?                                              Mixed (see below)

Depreciation                           $24,500 per year

Insurance                                 $18,000 per year

 

The accounting department believes that clerical expense is a mixed cost, containing both fixed and variable cost elements. A tabulation has been made of clerical expense and sales over the last several years, as follows:

 

                        [Activity]        [Total (Mixed Cost]

Year                Units Sold      Clerical Expense $

2009                10,000             $125,000

2010                  7,000             $100,000

2011                  8,000             $105,000

2012                11,000             $140,000

2013                  9,000             $120,000

2014                15,000             $160,000

 

The president of Stirling Company would like a cost formula developed for clerical expenses so that a contribution-type income statement can be prepared for management’s use.

Stirling Company plans to sell 12,000 units during 2015 at a selling price of $100 per unit. Prepare a budgeted income statement for the year using the contribution format. (10 points)

 

BIG HINT: Your Net Income should equal $208,000 J

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