Question

Todrick Company is a merchandiser that reported the following information based on 1,000 units sold:

Sales	$	450,000
Beginning merchandise inventory	$	30,000
Purchases	$	300,000
Ending merchandise inventory	$	15,000
Fixed selling expense	$	?
Fixed administrative expense	$	18,000
Variable selling expense	$	22,500
Variable administrative expense	$	?
Contribution margin	$	90,000
Net operating income	$	27,000

Required:

1. Prepare a contribution format income statement.

2. Prepare a traditional format income statement.

3. Calculate the selling price per unit.

4. Calculate the variable cost per unit.

5. Calculate the contribution margin per unit.

6. Which income statement format (traditional format or contribution format) would be more useful to managers in estimating how net operating income will change in responses to changes in unit sales?

Answer 1

Answer 1.

Cost of goods sold = Beginning merchandise inventory + Purchases - Ending merchandise inventory
Cost of goods sold = $30,000 + $300,000 - $15,000
Cost of goods sold = $315,000

Contribution margin = Sales - Cost of goods sold - Variable selling expense - Variable administrative expense
$90,000 = $450,000 - $315,000 - $22,500 - Variable administrative expense
Variable administrative expense = $22,500

Net operating income = Contribution margin - Fixed selling expense - Fixed administrative expense
$27,000 = $90,000 - Fixed selling expense - $18,000
Fixed selling expense = $45,000

Answer 2.

Answer 3.

Selling price per unit = Sales / Units sold
Selling price per unit = $450,000 / 1,000
Selling price per unit = $450.00

Answer 4.

Variable cost per unit = Variable expense / Units sold
Variable cost per unit = $360,000 / 1,000
Variable cost per unit = $360.00

Answer 5.

Contribution Margin per unit = Selling price per unit - Variable cost per unit
Contribution Margin per unit = $450.00 - $360.00
Contribution Margin per unit = $90.00

Answer 6.

Contribution format income statement would be more useful to managers in estimating change in net operating income in responses to change in unit sales.