Question

Problem 1-19 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 Beginning merchandise inventory Purchases Ending merchandise inventory Fixed selling expense Fixed administrative expense Variable selling expense Variable administrative expense Contribution margin Net operating income $ 210,000 $ 14,000 $ 140,000 $ 7,000 $ 8,400 $ 10,500 $ 42,000 $ 12,600 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

SOLUTION

1. Contribution format income statement-

Particulars	Amount ($)	Amount ($)
Sales		210,000
Variable expenses:
Cost of goods sold (14,000+140,000-7,000)	147,000
Selling expenses	10,500
Administrative expense (168,000-147,000-10,500)	10,500
Total variable expenses (210,000-42,000)		168,000
Contribution margin		42,000
Fixed expenses:
Selling expenses (29,400-8,400)	21,000
Administrative expense	8,400
Total fixed expenses (42,000-12,600)		29,400
Net operating income		12,600

2. Traditional format income statement-

Particulars	Amount ($)	Amount ($)
Sales		210,000
Less: Cost of goods sold		147,000
Gross profit		63,000
Expenses:
Variable selling expense	10,500
Variable administrative expenses	10,500
Fixed selling expense	8,400
Fixed administrative expenses	21,000	50,400
Net operating income		12,600

3. Selling price per unit = Sales / Units

= $210,000 / 1,000 units = $210

4. Variable cost per unit = Variable expenses / Units

= $168,000 / 1,000 units = $168

5. Contribution margin per unit = Contribution margin / Units

= $42,000 / 1,000 units = $42

6. Contribution format income statement would be better to estimate change in operating income due to change in sales unit.