Question

Cherokee Inc. is a merchandiser that provided the following information:

		Amount
Number of units sold		20,000
Selling price per unit	$	30
Variable selling expense per unit	$	4
Variable administrative expense per unit	$	2
Total fixed selling expense	$	40,000
Total fixed administrative expense	$	30,000
Beginning merchandise inventory	$	24,000
Ending merchandise inventory	$	44,000
Merchandise purchases	$	180,000

Required:

1. Prepare a traditional income statement.

2. Prepare a contribution format income statement.

Answer 1

Sale = units sold ×Selling price = 20,000 × 30 = $6000,000 Cost of goods sold = Beginning inventory + Purchases - Ending inventory = $24,000 + $180,000 - 44,000 = $160,000

Selling expenses = (20,000 × 4) + $40,000 = $120,000.

Administrative expenses = (20000 × 2) + 30,000 =$70,000.

1) Cherokee inc, Traditional Income statement

Sales		$600,000
Cost of goods sold		160,000
Gross Profit		440,000
Selling and Administrative expenses:-
Selling Expenses	$120,000
Administrative expenses	70,000
		$190,000
Net Operating income		$250,000.

2) Cherokee Inc, Contribution Format Income statement.

Sales		$600,000
Variable Expenses
Cost of goods sold	$160,000
Selling expenses	80,000
Administrative expenses	40,000
		280,000
Contribution margin		320,000

Fixed Expenses
Selling expenses	$40,000
Administrative expenses	30,000
		$70,000
Net Operating income		$250,000.

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