Question

Exercise 1-6 (Algo) Traditional and Contribution Format Income Statements [LO1-6]

Cherokee Inc. is a merchandiser that provided the following information:

		Amount
Number of units sold		14,000
Selling price per unit	$	17
Variable selling expense per unit	$	1
Variable administrative expense per unit	$	1
Total fixed selling expense	$	20,000
Total fixed administrative expense	$	14,000
Beginning merchandise inventory	$	10,000
Ending merchandise inventory	$	25,000
Merchandise purchases	$	88,000

Required:

1. Prepare a traditional income statement.

2. Prepare a contribution format income statement.

Answer 1

1.

Cherokee, Inc.
Traditional Income Statement
	$	$
Sales (14,000 units*$17)		238,000.00
Less: Cost of goods sold		73,000.00
(10,000+88,000-25,000)
Gross Margin		165,000.00
Less:Selling and Administrative expenses:
Selling Expenses ((($1 per unit × 14,000 units) + $20,000)	34,000.00
Administrative Expense ((($1 per unit × 14,000 units) + $14,000)	28,000.00	62,000.00
Net operating Income		103,000.00

2.

Cherokee, Inc.
Contribution format Income Statement
	$	$
Sales (14,000 units*$17)		238,000.00
Less: Variable Expenses:
Cost of goods sold	73,000.00
(10,000+88,000-25,000)
Selling Expenses ($1 per unit × 14,000 units)	14,000.00
Administrative Expense ($1 per unit × 14,000 units)	14,000.00
Total Variable Expense		101,000.00
Contribution Margin (Sales-Variable expense)		137,000.00
Less: Fixed Expenses
Selling Expense	20,000.00
Administrative Expense	14,000.00
Total Fixed Expense		34,000.00
Net operating Income		103,000.00