Question

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 $ 1,218,000 $ 420 $ 45 16 $ 135,000 $ 110,000 $ 65,000 115,000 $ 290,000 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

1. Traditional income statement

The Alpine House, inc.
Traditional income statement
Sales		$ 1,218,000
Less: Cost of goods sold		(240,000)
Gross profit		$ 978,000
Less: Selling and Administration expenses
Selling expenses	265,500
Administration expenses	156,400	(421,900)
Net profit		$ 556,100

Working note

Number of units sold	Total sales / selling price per pair = 1,218,000 / 420	2,900 pairs/units
Cost of goods sold	Beginning merchandise inventory + merchandise purchase - ending merchandise inventory = 65,000 + 290,000 - 115,000	$ 240,000
Selling expenses	Total Variable selling expense + Total fixed selling expense Total variable selling expenses = number of units sold * variable selling expense per unit = 2,900*45 = 130,500 Total fixed selling expense = 135,000 Total selling expense = 130,500 + 135,000	$ 265,500
Administration expenses	Total variable administration expenses + Total fixed administration expenses Total variable expenses = number of units sold * variable administration expense per unit = 2,900*16 = 46,400 Total fixed administration expenses = 110,000 Total adminstration expenses = 46,400 + 110,000	$ 156,400

2. Contribution format income statement

The Alpine House, inc.
Contribution Format Income Statement
Sales		$ 1,218,000
Less:Variable Expenses
Cost of goods sold	240,000
Selling expenses	130,500
Administration expenses	46,400	(416,900)
Contribution margin		801,100
Less: Fixed expenses
Selling expenses	135,000
Administration expenses	110,000	(245,000)
Net profit		$ 556,100

Net profit calaculated through both statements will be equal.

Notes:

* Variable selling expenses and variable administration expenses are already calculated in the working note given below traditional income statement.

* Sometimes cost of goods include fixed expenses. But here, it is considered to be a fully variable expense.

Because cost of goods sold is calculated using beginning and ending merchandise inventory and merchandise purchase. Since, Alpine House, inc is a retailer, it is clear that merchandise is the one and only direct material which is fully variable in nature.

3. Contribution margin per unit

Total Contribution margin = $ 801,100 (from the contribution format income statement)

Number of units sold = 2,900 (already calculated)

Contribution margin per unit = Total contribution margin / number of units sold

= 801,100 / 2,900 = $ 276.24