Question

Cherokee Inc. is a merchandiser that provided the following information:

	Amount
Number of units sold		11,000
Selling price per unit	$	17
Variable selling expense per unit	$	2
Variable administrative expense per unit	$	2
Total fixed selling expense	$	20,000
Total fixed administrative expense	$	15,000
Beginning merchandise inventory	$	10,000
Ending merchandise inventory	$	22,000
Merchandise purchases	$	86,000

Required:

1. Prepare a traditional income statement.

2. Prepare a contribution format income statement.

Answer 1

Traditional Income Statement

Sales	11,000 x $17	187,000
Cost of goods sold	10,000 + 86,000 - 22,000	74,000
Gross Margin		113,000
Selling and administrative expenses:
Selling expense	(11,000 x 2) + 20,000	42,000
Administrative expense	(11,000 x 2) + 15,000	37,000
Net operating income		$34,000

Contribution format income statement

Sales		187,000
Variable expenses:
Cost of goods sold	74,000
Selling expense	22,000
Administrative expense	22,000	118,000
Contribution Margin		69,000
Fixed expenses:
Selling expense	20,000
Administrative expense	15,000	35,000
Net operating income		$34,000