Question

Problem 1-19 (Algo) Traditional and Contribution Format Income Statements [LO1-6]

Todrick Company is a merchandiser that reported the following information based on 1,000 units sold:

Sales	$	180,000
Beginning merchandise inventory	$	12,000
Purchases	$	120,000
Ending merchandise inventory	$	6,000
Fixed selling expense	$	?
Fixed administrative expense	$	7,200
Variable selling expense	$	9,000
Variable administrative expense	$	?
Contribution margin	$	36,000
Net operating income	$	10,800

Required:

1. Prepare a contribution format income statement.

2. Prepare a traditional format income statement.

3. Calculate the selling price per unit.

4. Calculate the variable cost per unit.

5. Calculate the contribution margin per unit.

6. Which income statement format (traditional format or contribution format) would be more useful to managers in estimating how net operating income will change in responses to changes in unit sales?

Answer 1

Contribution format Income Statement
Sales	180,000
Less: Variable costs
Cost of goods sold	126,000
Variable Selling expense	9,000
Variable Administrative expense	9,000
Contribution Margin	36,000
Less: Fixed costs
Fixed Selling Expense	18,000
Fixed Administrative Expense	7,200
Net Operating Income	10,800
Traditional format
Sales	180,000
Cost of goods sold	126,000
Gross Profit	54,000
Selling Expenses	27,000
Administrative Expenses	16,200
Net operating income	10,800
3.Selling price per unit	180
4.Variable cost per unit	144
5.Contribution Margin per unit	36
6.Contribution Margin Income statement as fixed costs remain fixed, it better analyses effect of change in sales on operating income