Question

Exercise 1-15 (Algo) Traditional and Contribution Format Income Statements [LO1-6] The Alpine House, Inc., is a large retailer of snow skis. The company assembled the information shown below for the quarter ended March 31: Sales Selling price per pair of skis Variable selling expense per pair of skis Variable administrative expense per pair of skis Total fixed selling expense Total fixed administrative expense Beginning merchandise inventory Ending merchandise inventory Merchandise purchases Amount $ 1,050,000 $ 420 $ 46 $ 20 $ 150,000 $ 120,000 $ 70,000 $ 110,000 $ 310,000 Required: 1. Prepare a traditional income statement for the quarter ended March 31. 2. Prepare a contribution format income statement for the quarter ended March 31. 3. What was the contribution margin per unit?

Answer 1

Hi

The difference between a traditional income statement and a contribution margin income statement lies in the treatment of variable and fixed expenses. This difference of treatment of two types of costs affects the format and uses of two statements.

Tradional appraoch is used for external reporting

Contribution appraoch is used for top management reporting

See below for formats and answer:

Part 1:

Income statement under Tradional approach
Particulars	Calc	$
Sales	A	1050000
Less: Cost of Goods sold	B	270000
Gross Margin	A- B=C	780000
Less: Operating expenses
Variable administrative expense	Note 2 below	50000
Fixed Adminsitrative expense	Given in Qns	120000
Variable selling expense	Note 2 below	115000
Fixed Selling expense	Given in Qns	150000
	Total--D	435000
Net profit	C-D	345000

Part 2:

Income statement under Contribution approach
Particulars	Calc	$
Sales		1050000
Less: Variable cost of Goods sold	Note 1 below	270000
Gross Contribution margin		780000
Less:
Variable administrative expense	Note 2 below	50000
Variable selling expense	Note 2 below	115000
Contribution margin		885000
Less:
Fixed Selling expense	Given in Qns	150000
Fixed Adminsitrative expense	Given in Qns	120000
Net profit		615000

Note 1
Opening inventory		70000
Add: Purchases		310000
Less: Closing inventory		-110000
Cost of Goods sold		270000
Note 2
Sales		1050000
Selling price		420
Units( sales/Selling price)		2500
Variable selling expense($46 x2500 units)		115000
Variable administrative expense ($20 x2500 units)		50000

Part 3:

Contribution margin per unit = Contribution margin/Units sold

Contribution margin per unit = 885000/2500 = 354/unit