Question

The Rhythm Shop is a large retailer of acoustic, electric, and bass guitars. An income statement for the company’s acoustic guitar department for a recent quarter is presented below:

THE RHYTHM SHOP Income Statement—Acoustic Guitar Department For the Quarter Ended March 31
Sales				$	2,880,000
Cost of goods sold					1,280,000
Gross margin					1,600,000
Selling and administrative expenses:
Selling expenses	$	520,000
Administrative expenses		320,000			840,000
Operating income				$	760,000

The guitars sell, on average, for $900 each. The department’s variable selling expenses are $87 per guitar sold. The remaining selling expenses are fixed. The administrative expenses are 30% variable and 70% fixed. The company purchases its guitars from several suppliers at an average cost of $400 per guitar.

THE RHYTHM SHOP Income Statement-Acoustic Guitar Department For the Quarter Ended March 31 Sales $2,880,000 Variable expenses: Cost of goods sold $ 1.280,000 Selling expensos Administrative expenses 1 280.000 Contribution margin 1.600.000 Fixed expenses: Selling expenses Administrative expenses Operating income $ 1.600.000

Answer 1

Contribution margin income statement		Total	Units
Sales		2,880,000	3,200
Variable Expenses:
Cost of Goods sold	1,280,000
Selling Expenses	278,400
Administrative Expenses	96,000	1,654,400
Contribution Margin		1,225,600
Fixed Expenses:
Selling Expenses	241,600
Administrative Expenses	224,000	465,600
Operating Income		760,000
Contribution margin per guitar = 1225600/3200 = $383
3.Operating income will increase by the amount of increase in contribution margin i.e. 110*383 = $42,130