Question

Multi Part Question. Show all your work

The Rhythm Shop is a large retailer of acoustic, electric, and bass guitars. An income statement for the company's acoustic guitar department for a recent quarter is presented below: THE RHYTHM SHOP Income Statement-Acoustic Guitar Department For the Quarter Ended March 31 Sales Cost of goods sold $1,600,000 800,000 800,000 Gross margin Selling and administrative expenses: Selling expenses Administrative expenses $ 400,000 200,000 600,000 Operating income $ 200,000 The guitars sell, on average, for $800 each. The department's variable selling expenses are $75 per guitar sold. The remaining selling expenses are fixed. The administrative expenses are 25% variable and 75% fixed. The company purchases its guitars from several suppliers at an average cost of $400 per guitar. Required: 1. Prepare an income statement for the quarter using the contribution approach. THE RHYTHM SHOP Income Statement-Acoustic Guitar Department For the Quarter Ended March 31 Variable expenses: 0 $ 0 Fixed expenses: 0 $ 0

Answer 1

1

Contribution margin Income statement

Particulars	Amount ($)	Amount ($)
Sales		1600000
Variable expenses:
Cost of goods sold	800000
selling expenses [($1600000 / $800) X $75]	150000
Administrative expenses ($200000 X 25%)	50000	1000000
Contribution margin		600000
Fixed expenses:
selling expenses ($400000 - $150000)	250000
Administrative expenses ($200000 X 75%)	150000	400000
Operating Income		200000

2

Contribution margin per guitar = (Contribution margin / number of guitars sold)
=> [$600000 / ($1600000 / $800)]
=> ($600000 / 2000 guitars)
=> $300 per guitar

3

Contribution margin increase by = (Contribution margin per guitar X additional guitars sold)
=> ($300 X 100 guitars)
=> $30000

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