Question

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

Sales	$	210,000
Beginning merchandise inventory	$	14,000
Purchases	$	140,000
Ending merchandise inventory	$	7,000
Fixed selling expense	$	?
Fixed administrative expense	$	8,400
Variable selling expense	$	10,500
Variable administrative expense	$	?
Contribution margin	$	42,000
Net operating income	$	12,600

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

notes :
1) to find out the cost of goods sold:
beginning merchandise inventory	$ 14,000
add : purchases	$ 140,000
less : ending merchandise inventory	( $ 7,000)
cost of goods sold	$ 147,000
2) to find out variable administrative expenses
sales	$ 210,000
less :
cost of goods sold	( $ 147,000)
variable selling expenses	( $ 10,500)
contribution margin	( $ 42,000)
variable administrative expenses	$ 10,500
3) to find out fixed selling expenses :
contribution margin	$ 42,000
less:
fixed administrative expenses	( $ 8,400)
net operating income	($ 12,600)
fixed selling expenses	( $ 21,000

REQUIRed
1) CONTRIBUTION MARGIN FORMAT INCOME STATEMENT :
todrick company's contribution margin income statement for the period ended
particulars	amount ($)	amount( $)
sales		$ 210,000
less : cost of goods sold	1,47,000
variable selling expense	10,500
variable administative expenses	10,500
Total direct and variable expenses		( $ 168,000)
contribution margin		$ 42,000
less :
fixed selling expense	21,000
fixed administrative expenses	8,400
total fixed expenses		($ 29,400)
net operating income		$ 12,600
2) todrick company traditional format income statement for the period ended
particulars	amount ($)	amount( $)
sales		$ 210,000
less: cost of goods sold		( $ 147,000)
gross profit		$ 63,000
less:
selling expenses ( fixed+ variable)	$ 31,500 { 10,500+21,000}
administrative expenses ( fixed + variable)	$ 18,900 { 10,500+8400}
Total direct and variable expenses		( $ 50,400)
net operating income		$ 12,600
3)    calculate selling price per unit :
selling price per unit = sales / units sold
selling price per unit = $ 210,000 / 1000 units sold = $ 210 per unit
4) calculate variable cost per unit
variable cost per unit = total direct and variable expenses / unit sold
variable cost per unit = $ 168,000 / 1000 units sold   = $ 168 per unit
5) calculate the contribution margin per unit
contribution margin per unit = contribution margin / units sold
contribution margin per unit = $ 42,000 / 1000 units sold
contribution margin per unit = $ 42 per unit

6) A contribution margin income statement is not issued to outside third parties and is more useful to internal

management in determining how profit will change in accordance with the change in sales volume.