Question

Cherokee Inc. is a merchandiser that provided the following information: 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 Amount 10,000 $ 18 $ 1 $ 3 $18,000 $15,000 $11,000 $24,000 $86,000 Required: 1. Prepare a traditional income statement. 2. Prepare a contribution format income statement

Answer 1

Answer 1.

CHEROKEE, INC.

Traditional Income Statement

Sales		$180,000
Cost of goods sold		73,000
Gross margin		107,000
Selling and administrative expenses:
Selling expenses	28,000
Administrative expenses	45,000
		73,000
Net operating income		$34,000

Working:

Sales: 10,000 units * $18 = $180,000

Cost of goods sold = Beginning merchandise inventory + Merchandise purchases - Ending merchandise inventory

= $11,000 + $86,000 - $24,000 = $73,000

Selling expenses = (10,000 units * $1) + $18,000 = $28,000

Administrative expenses = (10,000 units * $3) + $15,000 = $45,000

Answer 2.

CHEROKEE, INC.

Contribution Format Income Statement

Sales		$180,000
Variable expenses:
Cost of goods sold	73,000
Selling expenses	10,000
Administrative expenses	30,000
		113,000
Contribution margin		67,000
Fixed expenses:
Selling expenses	18,000
Administrative expenses	15,000
		33,000
Net operating income		$34,000

Working:

Sales: 10,000 units * $18 = $180,000

Cost of goods sold = Beginning merchandise inventory + Merchandise purchases - Ending merchandise inventory

= $11,000 + $86,000 - $24,000 = $73,000

Variable selling expenses = 10,000 units * $1 = $10,000

Variable administrative expenses = 10,000 units * $3 = $30,000