Question

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

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? Why?

Answer 1

1. Contribution format income statement

The variable administrative expense shown above ($12,000) is computed as follows:

The fixed selling expense shown above ($30,000) is computed as follows:

 

2. Traditional income statement

3. The selling price per unit is $300,000 ÷ 1,000 units sold = $300.

4. The variable cost per unit is $240,000 ÷ 1,000 units sold = $240.

5. The contribution margin per unit is $300 ‒ $240 = $60.

6. The contribution format is more useful because it organizes costs based on their cost behavior. The contribution format enables managers to quickly calculate how variable costs will change in response to changes in unit sales.

1. Contribution format income statement

The variable administrative expense shown above ($12,000) is computed as follows:

The fixed selling expense shown above ($30,000) is computed as follows:

 

2. Traditional income statement

 3. The selling price per unit is $300,000 ÷ 1,000 units sold = $300.

4. The variable cost per unit is $240,000 ÷ 1,000 units sold = $240.

5. The contribution margin per unit is $300 ‒ $240 = $60.

6. The contribution format is more useful because it organizes costs based on their cost behavior. The contribution format enables managers to quickly calculate how variable costs will change in response to changes in unit sales.