Question

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

Sales	$	225,000
Beginning merchandise inventory	$	15,000
Purchases	$	150,000
Ending merchandise inventory	$	7,500
Fixed selling expense	$	?
Fixed administrative expense	$	9,000
Variable selling expense	$	11,250
Variable administrative expense	$	?
Contribution margin	$	45,000
Net operating income	$	13,500

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

Answer 1.

Cost of Goods Sold = Beginning Merchandise Inventory + Purchases - Ending Merchandise Inventory
Cost of Goods Sold = $15,000 + $150,000 - $7,500
Cost of Goods Sold = $157,500

Contribution Margin = Sales - Variable Expenses
$45,000 = $225,000 - Variable Expenses
Variable Expenses = $180,000

Variable Expenses = Cost of Goods Sold + Variable Selling Expense + Variable Administrative Expense
$180,000 = $157,500 + $11,250 + Variable Administrative Expense
Variable Administrative Expense = $11,250

Net Operating Income = Contribution Margin - Fixed Expenses
$13,500 = $45,000 - Fixed Expenses
Fixed Expenses = $31,500

Fixed Expenses = Fixed Selling Expenses + Fixed Administrative Expenses
$31,500 = Fixed Selling Expenses + $9,000
Fixed Selling Expenses = $22,500

Answer 2.

Answer 3.

Selling Price per unit = Sales / Number of units sold
Selling Price per unit = $225,000 / 1,000
Selling Price per unit = $225

Answer 4.

Variable Cost per unit = Variable Expenses / Number of units sold
Variable Cost per unit = $180,000 / 1,000
Variable Cost per unit = $180

Answer 5.

Contribution Margin per unit = Contribution Margin / Number of units sold
Contribution Margin per unit = $45,000 / 1,000
Contribution Margin per unit = $45

Answer 6.

Contribution Format Income Statement will be more useful in estimating the effect of change in unit sales on net operating income.

Answer 2

Solution 1: Contribution Format Income Statement

Working Note:

Calculation of Cost of Goods Sold

Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory

= $15,000 + $150,000 - $7,500

= $157,500

Calculation of Variable Administrative Expense

Contribution Margin = Sales - Cost of Goods Sold - Variable Selling Expense - Variable Administrative Expense

so,

Variable Admnistrative Expense = Sales - Cost of Goods Sold - Variable Selling Expense - Contribution Margin

= $225,000 - $157,500 - $11,250 - $45,000

= $11,250

Calculation of Fixed Selling Expense

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

So,

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

= $45,000 - $9,000 - $13,500

= $22,500

Solution 2: Traditional Format Income Statement

Solution 3: Calculation of Selling Price Per Unit

Selling Price Per Unit = Total Sales / No. of units sold

= $225,000 / 1000 units

= $225

Solution 4: Calculation of Variable Cost Per Unit

Variable Cost per unit = Total Variable Cost / No. of units

= $180,000 / 1000 units

= $180

Solution 5: Calculation of Contribution Margin Per Unit

Contribution Margin Per Unit = Total Contribution / No. of Units

= $45,000 / 1,000

= $45

Solution: 6

Contribution Income statement format would be more useful to managers in estimating change in net operating income will in responses to changes in unit sales.