Question

Traditional Format Sales Cost of goods sold $12,000 Selling and administrative expenses: Selling Administrative Net operating income $3,100 1,900 Contribution Format $12,000 Sales 6,000 Variable expenses 6,000 Cost of goods sold $6,000 Variable selling 600 Variable administrative 400 5,000 Contribution margin $ 1,000 Fixed expenses: Fixed selling 2,500 Fixed administrative 1,500 Net operating income 7,000 5,000 4,000 $ 1000 For a manufacturing company, the cost of goods sold would include some variable costs, such as direct materials, direct labor, and variable overhead, and some fixed costs, such as foed manufacturing overhead. Income statement formats for manufacturing companies will be explored in greater detail in a subsequent chapter Cost of goods sold Beginning Ending - merchandise + Purchases - merchandise inventory inventory Beginning Cost of goods Ending - merchandise + Purchases - merchandise sold inventory inventory $7,000 + $3,000 - $4,000 $6,000

Answer 1

1.

(a)

Gross margin = Sales - Cost of goods sold

= $42,000 - $21,000

= $21,000

(b)

Gross margin - Total Selling and administration expense = Net operating income

= $21,000 - ($2,100 + $1,900 + $2,500 + $1,500)

= $13,000

(c)

Contribution margin = Total sales - Total Variable cost

= $42,000 - ($21,000 + $2,100 + $1,900)

= $17,000

2.

(a)

Gross margin = Sales - Cost of goods sold

= $44,940 - $22,470

= $22,470

(b)

Gross margin - Total Selling and administration expense = Net operating income

= $22,470 - ($2,247 + $2,033 + $2,500 + $1,500)

= $14,190

(c)

Contribution margin = Total sales - Total Variable cost

= $44,940 - $22,470 - $2,247 - $2,033

= $18,190

(d) When sales increased by 7% variable cost and gross margin also increases by 7%.