Question

Todrick Company is a merchandiser that reported the following information based on 1,000 units sold:

Sales	$	420,000
Beginning merchandise inventory	$	28,000
Purchases	$	280,000
Ending merchandise inventory	$	14,000
Fixed selling expense	$	?
Fixed administrative expense	$	16,800
Variable selling expense	$	21,000
Variable administrative expense	$	?
Contribution margin	$	84,000
Net operating income	$	25,200

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) -- Prepare a contribution format income statement.

Answer -

Todrick Company

Contribution Income Statement

	Calculation	Amount ($)	Amount ($)
Sales	Given in question	-	420000
Variable expenses:	-	-	-
Cost of goods sold	Beginning merchandise inventory + Purchases - Ending merchandise inventory = $28000 + $280000 - $14000	294000	-
Selling expense	Given in question	21000	-
Administrative expense	Sales - Contribution margin - Cost of goods sold - Variable selling expense = $420000 - $84000 - $294000 - $21000	21000	-
	$294000 + $21000 + $21000	-	336000
Contribution margin	$420000 - $336000	-	84000
Fixed expenses:	-	-	-
Selling expense	Contribution margin - Net operating income - Fixed administrative expense = $84000 - $25200 - $16800	42000	-
Administrative expense	Given in question	16800	-
	$42000 + $16800	-	58800
Net operating income	$84000 - $58800	-	25200

.

(2) -- Prepare a traditional format income statement.

Answer -

Todrick Company

Traditional Income Statement

	Calculation	Amount ($)	Amount ($)
Sales	Given in question	-	420000
Cost of goods sold	Beginning merchandise inventory + Purchases - Ending merchandise inventory = $28000 + $280000 - $14000	-	294000
Gross margin	$420000 - $294000	-	126000
Selling and Administrative expenses:	-	-	-
Administrative expense	$21000 + $16800	37800	-
Selling expense	$21000 + $42000	63000	-
	$37800 + $63000	-	100800
Net operating income	$126000 - $100800		25200

.

(3) -- Calculate the selling price per unit.

Answer -

Selling price per unit -

= Sales / Units sold

= $420000 / 1000 units

= $420

.

(4) -- Calculate the variable cost per unit.

Answer -

Variable cost per unit -

= Total variable costs / Units sold

= $336000 / 1000 units

= $336

.

(5) -- Calculate the contribution margin per unit.

Answer -

Contribution margin per unit -

= Contribution margin / Units sold

= $84000 / 1000 units

= 84

.

(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 -

Contribution income statement is more useful because it organizes costs based on their cost behavior. The contribution income statement format enables managers in estimating how net operating income will change in responses to changes in unit sales.