Question

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

Sales	$	390,000
Beginning merchandise inventory	$	26,000
Purchases	$	260,000
Ending merchandise inventory	$	13,000
Fixed selling expense	$	?
Fixed administrative expense	$	15,600
Variable selling expense	$	19,500
Variable administrative expense	$	?
Contribution margin	$	78,000
Net operating income	$	23,400

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?

note: would you be able to explain how you calculated the two missing expenses as well? thanks in advance!

Answer 1

ANSWER

1)

Contribution format Income Statement is shown as follows:(Amount in $)

Todrcik Company
Contribution Format Income Statement
Sales (A)		390,000
Variable Expenses:
Cost of Goods Sold	273,000
Selling Expenses	19,500
Administrative Expenses	19,500
Total Variable Cost (B)		(312,000)
Contribution Margin:(A-B=C)		78,000
Fixed Expenses:
Selling Expenses	39,000
Administrative Expenses	15,600
Total Fixed Expenses(D)		(54,600)
Net Operating Income(C-D)		23,400

Working Notes:

1) Variable Administrative Expenses = Sales - Cost of goods sold - Variable Selling Expenses- Contribution Margin

=$390,000-$273,000-$19,500-$78,000 = $19,500

2) Fixed Selling Expense = Contribution Margin - Fixed Administrative Expense - Net Operating Income

=$78,000-$15,600-$23,400 = $39,000

2)

Traditional format Income Statement is shown as follows: (Amount in $)

Todrcik Company
Traditional Format Income Statement
Sales (A)		390,000
Cost of Goods Sold(B)		273,000
Gross Margin (C= A-B)		117,000
Selling and Administrative Expenses:
Selling Expenses :
Fixed	39,000
Variable	19,500
Administrative Expense:
Fixed	15,600
Variable	19,500
Total Selling and Administrative Expenses(D)		(93,600)
Net Operating Income(C-D)		23,400

3)

Selling Price per Unit = Sales/ Total units sold

=$390,000/1000 = $390

4)

Variable Price Per Unit = Total Variable Cost/ Total Units Sold

= $312,000/1000 = $312

5)

Contribution Margin per Unit = Total Contribution Margin / Total Units Sold

=$78,000/1000 = $78

6)

Contribution Format Income Statement would be more useful to managers because Contribution Margin is directly proportional to the change in Sales. The Net Operating Income is affected only by Contribution Margin as Fixed Cost remain constant.