Question

O&A Corporation, a merchandising company, reported the following results for September:

Number of units sold……………………..…. 3,700

Selling price per unit ………………….…...…339

Cost of goods sold ………………….....531,500

Total Variable selling expense ………..….. 99,900

Total fixed selling expense …………..…77,800

Total Variable administrative expense …... 44,400

Total fixed administrative expense ……..185,200

You are required to:

1. prepare a contribution format income statement for May.

2. prepare a traditional format income statement for May.

Questions:

What is the total variable selling expense? (Contribution income statement format)

What is the total variable expense? (Contribution income statement format)

What is the contribution margin? (Contribution income statement format)

What is the gross margin? (Traditional income statement format)

What is the total administrative expense? (Traditional income statement format)

What is the net operating income? (Traditional income statement format)

Answer 1

In Contribution income statement format, we calculate revenue by deducting all variable and fixed expenses separately. In this, we consider cost of goods sold as a part of variable expense and expenses are categorised on the basis of variable and fixed expense and not categorised as production expense, selling expense or administrative expenses.

Ans.1:

As it is clearly mentioned in the question, so

Total variable selling expense = $99,000

Ans.2:

Total variable expense = Cost of goods sold + Total Variable selling expense + Total Variable administrative expense

= $531,500 + $99,000 + $44,000 = $674500

Ans.3:

Contribution margin = Sales revenue - Total variable expense

Sales revenue = 3700 *339 = $1254300

Total variable expense = $674500

Contribution margin = $1254300 -  $674500 = $579800

In Traditional income statement format, first we calculate gross margin by deducting COGS from sales rvevenue. After this we deduct selling and administrative expense from gross margin to find Net income. In this, we will not include COGS in variable cost rather it will be shown separately to get gross margin.

Ans.4:

Gross margin = Sales revenue - COGS

=  (3700 *339) - $531,500

= $1254300 - $531,500

= $722800

Ans.5:

Total administrative expense = Total Variable administrative expense + Total fixed administrative expense

= 44,400 + 185,200

= $229600

Ans.6:

Net operating income = Sales revenue - COGS - Total selling and administrative expense

Total selling expense = Total Variable selling expense + Total fixed selling expense

= 99900 + 77800

= $177700

Net operating income = $1254300 - $531,500 - ( $177700 + $229600 )

= 722800 - 407300

= $315500