Question

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

	Amount
Number of units sold		12,000
Selling price per unit	$	16
Variable selling expense per unit	$	1
Variable administrative expense per unit	$	2
Total fixed selling expense	$	22,000
Total fixed administrative expense	$	15,000
Beginning merchandise inventory	$	10,000
Ending merchandise inventory	$	25,000
Merchandise purchases	$	88,000

Required:

1. Prepare a traditional income statement.

2. Prepare a contribution format income statement.

Answer 1

The main difference between traditional income statement and contribution format income statement is that traditional income statement is prepared by function and the contribution income statement is prepared according to nature.

Part 1

CHEROKEE, INC.

Traditional Income Statement

Sales (12000*16)		192000
Cost of goods sold (10000+88000-25000)		73000
Gross margin		119000
Selling and administrative expenses
Selling expenses (12000*1)+22000	34000
Administrative expenses (12000*2)+15000	39000
		73000
Net operating income		$46000

Part 2

CHEROKEE, INC.

Contribution Format Income Statement

Sales (12000*16)		192000
Variable expenses:
Cost of gods sold (10000+88000-25000)	73000
Selling expenses (12000*1)	12000
Administrative expenses (12000*2)	24000
		109000
Contribution margin		83000
Fixed expenses
Selling expenses	22000
Administrative expenses	15000
		37000
Net operating income		$46000