Question

Todrick Company is a merchandiser that reported the following information based on 1,000 units sold: $ 210,000 $ 14,000 $ 140,000 $ 7,000 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 $ $ $ $ $ 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

1			Contribution format income statement
						$	$
	Sales						210000
	Less: Variable expenses
	Cost of goods sold				(Note:1)	147000
	Variable selling expenses					10500
	Variable administrative expenses				(Note:2)	10500	168000
	Contribution margin						42000
	Less: Fixed expenses
	Fixed selling expenses				(Note:3)	21000
	Fixed administrative expenses					8400	29400
	Net operating income						12600
	Note:1
	Cost of goods sold=Beginning merchandise inventory+Purchases-Ending merchandise inventory=14000+140000-7000=$ 147000
	Note:2
	Contribution margin=Sales-Variable expenses
	Variable expenses=Sales-Contribution margin=210000-42000=$ 168000
	Variable expenses=Sales-Cost of goods sold+Variable selling expenses+Variable administrative expenses
	Variable administrative expenses=Variable expenses-Sales-Cost of goods sold-Variable selling expenses=168000-147000-10500=$ 10500
	Note:3
	Net operating income=Contribution margin-Fixed expenses
	Fixed expenses=Contribution margin-Net operating income=42000-12600=$ 29400
	Fixed expenses=Fixed selling expense+Fixed administrative expense
	Fixed selling expense=Fixed expenses-Fixed administrative expense=29400-8400=$ 21000
2			Traditional format income statement
						$	$
	Sales						210000
	Less: Cost of goods sold						147000
	Gross profit						63000
	Less:Selling and administrative expense
	Variable selling expenses					10500
	Variable administrative expenses				(Note:2)	10500
	Fixed selling expenses				(Note:3)	21000
	Fixed administrative expenses					8400	50400
	Net operating income						12600
3	Selling price per unit=Sales/Units sold=210000/1000=$ 210
4	Variable cost per unit=Total variable expenses/Units sold=168000/1000=$ 168
5	Contribution margin per unit=Contribution margin/Units sold=42000/1000=$ 42
6	Contribution margin income statement