Question

Cherokee Inc. is a merchandiser that provided the following information: Amount 13,000 15 Number of units sold Selling price per unit Variable selling expense per unit Variable administrative expense per unit Total fixed selling expense Total fixed administrative expense Beginning merchandise inventory Ending merchandise inventory Merchandise purchases 2$ 2$ 24 $20,000 $ 14,000 $ 11,000 $ 23,000 $ 88,000 Required: 1. Prepare a traditional income statement. 2. Prepare a contribution format income statement.

Answer 1

Requirement 1

Traditional income statement depicts the regularly used income statement format starting from calculating gross margin and reducing fixed and variable expense at once to arrive at net operating income.

Note that,

Cost of goods sold = Beginning inventory + Merchandise purchases – Closing inventory

                                                                                Cherokee Inc                                                    

Traditional Income Statement

Particulars	Amount ($)	Amount ($)
Sales (13,000 * 15)		195,000
Less: Cost of goods sold (11,000 + 88,000 – 23,000)		76,000
Gross Margin		119,000
Less: Selling and administrative expense
Variable administration expense (13000 * 2 )	26,000
Fixed administration expense	14,000
Variable selling expense ( 13000 * 2)	26,000
Fixed selling expense	20,000
Total selling and administrative expense		86,000
Net income		$ 33,000

Requirement 2

Contribution income format depicts the segregation of variable and fixed costs. Variable costs are reduced from sales to arrive at contribution margin while fixed costs are reduced from contribution margin to arrive at net operating income.

Cherokee Inc                                                    

Contribution Format Income Statement

Particulars	Amount ($)	Amount ($)
Sales (13,000 * 15)		195,000
Less: Variable expenses
Cost of goods sold (11,000 + 88,000 – 23,000)	76,000
Variable administration expense (13000 * 2 )	26,000
Variable selling expense ( 13000 * 2)	26,000	128,000
Contribution margin		67,000
Less: Fixed expenses
Fixed administration expense	14,000
Fixed selling expense	20,000	34,000
Net Operating Income		$ 33,000

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