Question

Maui Mike's is a large retailer of surfboards. The company assembled the information shown below for the quarter ended May 31: Amount Total sales revenue $750,000 Selling price per unit $500 Variable selling expense per unit $40 Variable administrative expense per unit $15 Total fixed selling expense $125,000 Total fixed administrative expense $100,000 Merchandise inventory, beginning balance $65,000 Merchandise inventory, ending balance $85,000 Merchandise purchases $295,000 Required: 1. Prepare a traditional income statement for the quarter ended May 31. 2. Prepare a contribution format income statement for the quarter ended May 31. [L06]

Answer 1

Sales revenue = $750,000

Selling price per unit = $500

Number of units sold = Sales revenue/Selling price per unit

= 750,000/500

= 1,500

Variable selling expense per unit = $40

Variable administrative expense per unit = $15

Total Variable Selling expenses = Variable selling expense per unit x Number of units sold

= 40 x 1,500

= $60,000

Total Variable Administrative expenses = Variable administrative expense per unit x  Number of units sold

= 15 x 1,500

= $22,500

1.

Traditional Income statement

Sales		750,000
Cost of goods sold:
Beginning inventory	65,000
Purchases	295,000
Cost of goods available for sale	360,000
Ending inventory	- 85,000
Cost of goods sold		- 275,000
Gross profit		475,000
Operating expenses:
Variable Administrative expenses	22,500
Variable Selling expenses	60,000
Fixed Administrative expenses	100,000
Fixed Selling expenses	125,000
Total operating expenses		- 307,500
Net income		$167,500

2.

Cost of goods sold = Beginning inventory + Purchases - Ending inventory

= 65,000 + 295,000 - 85,000

= $275,000

Contribution format Income statement

Sales		750,000
Variable expenses:
Cost of goods sold	275,000
Variable Administrative expenses	22,500
Variable Selling expenses	60,000
Total Variable expenses		- 357,500
Contribution margin		392,500
Fixed expenses:
Fixed Administrative expenses	100,000
Fixed Selling expenses	125,000
Total Fixed expenses		- 225,000
Net income		$167,500