Question

Cost Behavior

Prepare income statement in two formats

Farnsworth Drycleaners has capacity to clean up to 7,500 garments per month. The following operating data is available for Farnsworth.

Amount charged per garment for dry cleaning: $10.00

Variable cost per garment: $0.70

Fixed costs per month: $14,400

Use the blue shaded areas on the ENTERANSWERS tab for inputs.

Always use cell references and formulas where appropriate to receive full credit. If you copy/paste from the Instruction tab you will be marked wrong.

Requirements

1- Using the traditional format, prepare Farnsworth’s projected income statement for July assuming 4,260 garments are cleaned during the month.

a. Check your spelling carefully and do not abbreviate.

b. Enter all amounts as positive values. Do not use a minus sign or parentheses for any values to be subtracted.

2- Using the contribution margin format, prepare Farnsworth’s projected income statement for July assuming 4,260 garments are cleaned during the month.

a. Check your spelling carefully and do not abbreviate.

b. Enter all amounts as positive values. Do not use a minus sign or parentheses for any values to be subtracted.

Answer 1

• All working forms part of the answer
• Amounts are in $
• Under traditional costing, cost of goods sold is calculated which includes fixed overhead absorbed to units cost.
• Answer 1: Income Statement using traditional Format

Working

Fixed Cost per month	$14400
Capacity [garments]	7500
Fixed cost per garment	$1.92
Variable cost per garment	$0.7
Total cost to produce one garment	$2.62

Income Statement

	Amount ($)	Working
Sales Revenue	42600	[4260 garments x $10]
(-) Cost of Goods Sold	11161.2	[4260 garments x $2.62]
Gross Profit	31438.8
(-) Expenses	No info	[not given]
Net operating Income	$31438.8

• Answer 2: Contribution margin Income Statement

	Amount ($)	Working
Sales Revenue	42600	[4260 garments x $10]
(-) Variable cost	2982	[4260 x $0.7]
Contribution margin	39618
(-) Fixed Cost	14400	[total given]
Net operating Income	$25218