Question

7. Bob's Company is a merchandiser that reported the following information based on 1,000 units sold: Sales $300,000 Beginning merchandise inventory$ 20,000 Purchases $200,000 Ending merchandise inventory $ 7,000 Fixed selling expense $ 3.000 Fixed administrative expense $ 12,000 Variable selling expense $ 15,000 Variable administrative expense $ 4,000 Contribution margin $ 60,000 Net operating income $ 18,000 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

1. Contribution format income statement has been prepared below :
Particulars	Amount ($)
Sales	3,00,000
Less : Variable Costs :
Purchases (Material)	2,00,000
Variable selling expense	15,000
Variable administrative Expense	4,000
Contribution Margin	81,000
Less : Fixed Costs	3,000
Net Profit	78,000
2. Traditional income statement is as follows :
I. Revenue from Operations
Sales	3,00,000
Total	3,00,000
II. Expenses
Purchases	2,00,000
Change in Inventory (Opening - Closing)	13,000
Operating Expenses (Selling & Administrative expenses)	34,000
Total	2,47,000
III. Net Income (I. - II.)	53,000
3. Calculation of Selling Price per Unit
No. of units sold = 1000 units
Sales Value = 300,000 $
Selling Price p.u = 300,000 $ / 1000 units = 300 $ per unit
4. Calculation of Variable Costs per unit
Total Variable costs as per calculations made in 1st part above = 219,000 $
V.C p.u = 219,000 $ / 1000 units = 219 $ per unit
5. Calculation of Contribution Margin per unit
Contribution margin as calculated in 1st part above = 81,000 $
No. of units sold = 1000 units
Cont. Margin p.u = 81,000 $ / 1000 units = 81 $ per unit
6. Contribution format income statement will be more helpful to managers in estimating how net operating income will change in responses to change in unit sales since contribution format first calculates the variable cost per unit which varies in accordance with the number of units sold and the fixed cost which remains fixed irrespective of the number of units sold. Hence if there is a change in unit sales, managers can simply multiply the number of unit sales with the V.C p.u and subtract Fixed cost from Contribution to arrive at the Net Operating Income.