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5 June, 13:28

Cherokee Inc. is a merchandiser that provided the following information: Amount Number of units sold 20,000 Selling price per unit $ 30 Variable selling expense per unit $ 4 Variable administrative expense per unit $ 2 Total fixed selling expense $ 40,000 Total fixed administrative expense $ 30,000 Beginning merchandise inventory $ 24,000 Ending merchandise inventory $ 44,000 Merchandise purchases $ 180,000. Required: 1) Prepare a traditional income statement. 2) Prepare a contribution format income statement.

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  1. 5 June, 13:56
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    1) Traditional Income Statement

    Particulars Value Total Amount

    Sales 20,000 units @ $30 = $600,000

    Less: Manufacturing Expenses

    Cost of goods sold $24,000 + $180,000 - $44,000 $160,000

    Gross Margin $440,000

    Less: Operating Expenses

    Administrative Expense $70,000

    Selling expense $120,000 $190,000

    Operating Income $250,000

    Note: In traditional statement fixed and variable are not segregated and only direct cost associated is subtracted to calculate cost of goods sold, then gross margin is calculated. After that selling and administration expenses are deducted to calculate net operating income.

    2) Contribution format income Statement

    Particulars Total Amount

    Sales 20,000 units @ $30 = $600,000

    Less : Variable Costs

    Cost of goods sold $24,000 + $180,000 - $44,000 $160,000

    Variable selling expense $4 X 20,000 $80,000

    Variable Administrative Cost $2 X 20,000 $40,000

    Contribution Margin $320,000

    Less: Fixed Cost

    Fixed Selling expense $40,000

    Fixed Administration Expense $30,000

    Net operating Income $250,000

    Note: In contribution statement fixed and variable expenses are segregated and firstly after deducting variable expense contribution margin on sales is calculated, and then after that deducting fixed cost we get net operating income.
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