Question

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

	Amount
Number of units sold		14,000
Selling price per unit	$	16
Variable selling expense per unit	$	2
Variable administrative expense per unit	$	2
Total fixed selling expense	$	21,000
Total fixed administrative expense	$	16,000
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

Solution 1:

Cherokee Inc.
Traditional income statement
Particulars		Amount
Sales		$224,000.00
Cost of goods sold:
Beginning merchandise inventory	$10,000.00
Add: Purchases	$88,000.00
Cost of goods available for sale	$98,000.00
Less: Ending merchandise inventory	$25,000.00
Cost of goods sold		$73,000.00
Gross profit		$151,000.00
Selling & Administrative expenses:
Variable selling expenses	$28,000.00
Fixed selling expenses	$21,000.00
Variable administrative expenses	$28,000.00
Fixed administrative expenses	$16,000.00
Total selling & Administrative expenses		$93,000.00
Net operating income		$58,000.00

Solution 2:

Cherokee Inc.
Contribution format income statement
Particulars		Amount
Sales		$224,000.00
Variable costs:
Cost of goods sold	$73,000.00
Variable selling expenses	$28,000.00
Variable administrative expenses	$28,000.00
Total Variable costs		$129,000.00
Contribution margin		$95,000.00
Fixed Expenses:
Fixed selling expenses	$21,000.00
Fixed administrative expenses	$16,000.00
Total fixed expenses		$37,000.00
Net operating income		$58,000.00