Question

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

		Amount
Number of units sold		11,000
Selling price per unit	$	18
Variable selling expense per unit	$	2
Variable administrative expense per unit	$	1
Total fixed selling expense	$	20,000
Total fixed administrative expense	$	15,000
Beginning merchandise inventory	$	9,000
Ending merchandise inventory	$	22,000
Merchandise purchases	$	86,000

Required:

1. Prepare a traditional income statement.

2. Prepare a contribution format income statement.

Answer 1

1.

Traditional income statement

Sales (11,000 x 18)		198,000
Cost of goods sold:
Beginning merchandise inventory	9,000
Merchandise purchases	86,000
Ending merchandise inventory	- 22,000
Cost of goods sold		- 73,000
Gross profit		125,000
Less: Operating expenses
Variable administrative expenses (11,000 x 1)		- 11,000
Variable selling expenses (11,000 x 2)		- 22,000
Total fixed selling expenses		- 20,000
Total fixed administrative expenses		- 15,000
Net operating income		$57,000

2.

contribution format income statement

Sales			198,000
Variable expenses:
Cost of goods sold
Beginning merchandise inventory	9,000
Merchandise purchases	86,000
Ending merchandise inventory	- 22,000
Cost of goods sold		73,000
Variable administrative expenses		11,000
Variable selling expenses		22,000
Total variable expenses			- 106,000
Contribution margin			92,000
Fixed expenses:
Total fixed administrative expenses		15,000
Total fixed selling expenses		20,000
Total fixed expenses			- 35,000
Net operating income			$57,000