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		13,000
Selling price per unit	$	17
Variable selling expense per unit	$	1
Variable administrative expense per unit	$	3
Total fixed selling expense	$	20,000
Total fixed administrative expense	$	16,000
Beginning merchandise inventory	$	9,000
Ending merchandise inventory	$	23,000
Merchandise purchases	$	87,000

Required:

1. Prepare a traditional income statement.

2. Prepare a contribution format income statement.

Answer 1

Solution:
1.
	Cherokee, Inc.
	Traditional Income Statement
	Sales		$221,000
	Cost of goods sold		73,000
	Gross margin		148,000
	Selling and administrative expenses:
	Administrative expenses	55,000
	Selling expenses	33,000
			88,000
	Net operating income		$60,000
Working Notes:
	Cherokee, Inc.
	Traditional Income Statement
	Sales		$221,000	a
	[No. of units sold x selling price per unit]
	[13,000 x $17 ]
Less:	Cost of goods sold		73,000	b
	[Beginning merchandise inventory + Merchandise purchases - Ending merchandise inventory]
	[9,000 + 87,000 - 23,000]
	Gross margin		148,000	c=a-b
	Selling and administrative expenses:
	Administrative expenses	55,000		d
	[(variable admin exp. Per unit x no. of units sold) + total fixed admin. exp. ]
	[(3 x 13,000) + 16,000]
	Selling expenses	33,000		e
	[(variable selling exp. Per unit x no. of units sold) + total fixed selling exp. ]
	[(1 x 13,000) + 20,000]
			88,000	f=d+e
	Net operating income		$60,000	g=c-f
2.	Cherokee, Inc.
	Contribution Format Income Statement
a	Sales		221,000
	Variable expenses:
b	Cost of goods sold	73,000
c	Selling expenses	13,000
d	Administrative expenses	39,000
e=b+c+d			125,000
f=a-e	Contribution margin		96,000
	Fixed expenses:
g	Selling expenses	20,000
h	Administrative expenses	16,000
i=g+h			36,000
j=f-i	Net operating income		60,000
Working Notes:
	Cherokee, Inc.
	Contribution Format Income Statement
	Sales			$221,000
	[No. of units sold x selling price per unit]
	[13,000 x $17 ]
	Variable expenses:
	Cost of goods sold		73,000
	[Beginning merchandise inventory + Merchandise purchases - Ending merchandise inventory]
	[9,000 + 87,000 - 23,000]
	Selling expenses		13,000
	[(variable selling exp. Per unit x no. of units sold]
	[1 x 13,000 ]
	Administrative expenses		39,000
	[(variable admin exp. Per unit x no. of units sold]
	[3 x 13,000 ]
				125,000
	Contribution margin			96,000
	Fixed expenses:
	Selling expenses		20,000
	Administrative expenses		16,000
				36,000
	Net operating income			60,000
Please feel free to ask if anything about above solution in comment section of the question.