Question

Fanelli Corporation, a merchandising company, reported the following results for July:

Number of units sold		5,200
Selling price per unit	$	600
Unit cost of goods sold	$	404
Variable selling expense per unit	$	54
Total fixed selling expense	$	124,700
Variable administrative expense per unit	$	24
Total fixed administrative expense	$	206,600

Cost of goods sold is a variable cost in this company.

Required:

a. Prepare a traditional format income statement for July.

b. Prepare a contribution format income statement for July.

Answer 1

Under traditional format income statement, both variable and fixed costs are mixed and provided under cost of goods sold.

On the other hand, the variable costs are deducted from sales to arrive at contribution margin and later fixed costs are deducted from contribution margin to obtain net operating income.

The net operating income is same in both the formats.

Traditional format income statement for July.

Particulars	Amount ($)	Amount ($)
Sales (5200*600)		$    3,120,000
Less:   Cost of goods sold (404*5200)		$ (2,100,800)
Gross margin		$    1,019,200
Less: selling and administrative expenses
Selling expenses (280,800 + 124,700)	$       405,500
administrative expenses (124,800 +206,600)	$       331,400	$     (736,900)
Net operating income		$       282,300

Contribution format income statement for July

Particulars	Amount ($)	Amount ($)
Sales (5200*600)		$    3,120,000
Less: Variable expenses
Cost of goods sold (404*5200)	$    2,100,800
Variable selling (54*5200)	$       280,800
Variable administrative (24*5200)	$       124,800	$    2,506,400
Contribution margin		$       613,600
Less: Fixed expenses
Fixed selling	$       124,700
Fixed administrative	$       206,600	$       331,300
Net operating income		$       282,300

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