Question

Problem 1-19 Traditional and Contribution Format Income Statements [LO1-6]

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

Sales	$	285,000
Beginning merchandise inventory	$	19,000
Purchases	$	190,000
Ending merchandise inventory	$	9,500
Fixed selling expense	$	?
Fixed administrative expense	$	11,400
Variable selling expense	$	14,250
Variable administrative expense	$	?
Contribution margin	$	57,000
Net operating income	$	17,100

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?

Prepare a contribution format income statement.

	Todrick Company Contribution Format Income Statement Sales Variable expenses: Cost of goods sold Selling expense Administrative expense 0 Contribution margin Fixed expenses: Selling expense Administrative expense 0 Net operating income

Answer 1

Solution 1:

Todrick Company
Contribution format Income Statement
Sales		$2,85,000
Variable Expenses:
Coat of goods sold ($19000+$190000-$9500)	$1,99,500
Variable Selling Expenses	$14,250
Variable Administrative Expenses ($228000-199500-14250)	$14,250
Total Variable Expenses ($285000-$57000)		$2,28,000
Contribution Margin		$57,000
Fixed Expenses:
Fixed Selling Expenses ($39900 -$11400)	$28,500
Fixed Administrative Expenses	$11,400
Total Fixed Expenses ($57000-$17100)		$39,900
Net Operating Income		$17,100

Solution 2:

Todrick Company
Traditional format Income Statement
Sales		$2,85,000
Less: Cost Of Goods sold		$1,99,500
Gross Profit		$85,500
Selling and Administrative Expenses:
Variable Selling Expenses	$14,250
Variable Administrative Expenses	$14,250
Fixed Selling Expenses	$28,500
Fixed Administrative Expenses	$11,400
Total expenses		$68,400
Net Operating Income		$17,100

Solution 3:

Selling price per unit = $285000 / 1000 = $285

Solution 4:

variable cost per unit = Total Variable expense / units = $228000 / 1000 = $228

Solution 5:

contribution margin per unit = $285 - $228 = $57 per unit

Solution 6:

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