Question

Exercise 1-6 Traditional and Contribution Format Income Statements [LO1-6]

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

Number of units sold		13,000
Selling price per unit	$	17
Variable selling expense per unit	$	2
Variable administrative expense per unit	$	2
Total fixed selling expense	$	20,000
Total fixed administrative expense	$	14,000
Beginning merchandise inventory	$	8,000
Ending merchandise inventory	$	22,000
Merchandise purchases	$	88,000

Required:

1.

Prepare a traditional income statement. Cherokee, Inc. Traditional Income Statement Sales $221,000 Cost of goods sold 74,000 Gross margin 147,000 Selling and administrative expenses: Administrative expenses 40,000 Selling expenses 46,000 86,000 Net operating income $61,000 + 2. Prepare a contribution format income statement. Cherokee, Inc. Contribution Format Income Statement Sales Variable expenses: Cost of goods sold 0 Fixed expenses: 0 Net operating income +

Answer 1

Solution:
1.
	Cherokee, Inc.
	Traditional Income Statement
	Sales		$221,000
	Cost of goods sold		74,000
	Gross margin		147,000
	Selling and administrative expenses:
	Administrative expenses	40,000
	Selling expenses	46,000
			86,000
	Net operating income		$61,000
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		74,000	b
	[Beginning merchandise inventory + Merchandise purchases - Ending merchandise inventory]
	[8,000 + 88,000 - 22,000]
	Gross margin		147,000	c=a-b
	Selling and administrative expenses:
	Administrative expenses	40,000		d
	[(variable admin exp. Per unit x no. of units sold) + total fixed admin. exp. ]
	[(2 x 13,000) + 14,000]
	Selling expenses	46,000		e
	[(variable selling exp. Per unit x no. of units sold) + total fixed selling exp. ]
	[(2 x 13,000) + 20,000]
			86,000	f=d+e
	Net operating income		$61,000	g=c-f
2.	Cherokee, Inc.
	Contribution Format Income Statement
	Sales		221,000
	Variable expenses:
	Cost of goods sold	74,000
	Selling expenses	26,000
	Administrative expenses	26,000
			126,000
	Contribution margin		95,000
	Fixed expenses:
	Selling expenses	20,000
	Administrative expenses	14,000
			34,000
	Net operating income		61,000
Working Notes:
	Cherokee, Inc.
	Contribution Format Income Statement
	Sales			$221,000	a
	[No. of units sold x selling price per unit]
	[13,000 x $17 ]
	Variable expenses:
	Cost of goods sold		74,000		b
	[Beginning merchandise inventory + Merchandise purchases - Ending merchandise inventory]
	[8,000 + 88,000 - 22,000]
	Selling expenses		26,000		c
	[(variable selling exp. Per unit x no. of units sold]
	[2 x 13,000 ]
	Administrative expenses		26,000		d
	[(variable admin exp. Per unit x no. of units sold]
	[2 x 13,000 ]
				126,000	e=b+c+d
	Contribution margin			95,000	f=a-e
	Fixed expenses:
	Selling expenses		20,000		g
	Administrative expenses		14,000		h
				34,000	i=g+h
	Net operating income			61,000	j=f-i
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