Question

Cherokee Inc. is a merchandiser that provided the following information: Amount 20,000 30 Number of units sold Selling price per unit Variable selling expense per unit Variable administrative expense per unit Total fixed selling expense Total fixed administrative expense Beginning merchandise inventory Ending merchandise inventory Merchandise purchases 4 2 $ 40,000 $ 30,000 $ 24,000 $ 44,000 $ 180,000 Required: 1. Prepare a traditional income statement. 2. Prepare a contribution format income statement.

Answer 1

Cherokee. Inc.
Traditional Format Income Statement
Sales [Units sold x Selling Price per unit = 20,000 units x $30]		$600,000
Cost of Goods Sold       [Refer working Note ]		$160,000
Gross margin          [$600,000 - $160,000]		$440,000
Selling and Administrative Expenses:
Selling expenses             [Variable cost + Fixed cost = (20,000 x $4) + $40,000]	$120,000
Administrative expenses [Variable cost + Fixed cost = (20,000 x $2) + $30,000]	$70,000
		$190,000
Net Operating Income      [$440,000 - $190,000]		$250,000

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Cherokee. Inc.
Contribution Format Income Statement
Sales [Units sold x Selling Price per unit = 20,000 units x $30]		$600,000
Variable Expenses:
Cost of Goods Sold        [Refer working Note ]	$160,000
Selling expenses             [Variable cost = 20,000 x $4]	$80,000
Administrative expenses [Variable cost = 20,000 x $2]	$40,000
		$280,000
Contribution margin       [$600,000 - $280,000]		$320,000
Fixed Expenses:
Selling expenses	$40,000
Administrative expenses	$30,000
		$70,000
Net Operating Income   [$320,000 - $70,000]		$250,000

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Working Note – Calculation of Cost of Goods sold
Beginning merchandise Inventory	$24,000
Add: Merchandise Purchases	$180,000
Cost of goods available for sale	$204,000
Less: Ending merchandise Inventory	$44,000
Cost of Goods Sold	$160,000