Cherokee Inc. is a merchandiser that provided the following information: Amount Number of units sold 13,000 Selling price per unit $ 16 Variable selling expense per unit $ 2 Variable administrative expense per unit $ 3 Total fixed selling expense $ 21,000 Total fixed administrative expense $ 15,000 Beginning merchandise inventory $ 11,000 Ending merchandise inventory $ 25,000 Merchandise purchases $ 88,000 Required: 1. Prepare a traditional income statement. 2. Prepare a contribution format income statement.

1. Gross margin is $134,00; and Net profit is $33,000.

2. Contribution margin is $69,000; and Net profit is $33,000.

Explanation:

To prepare the statements, the following calculations are done first:

Sales revenue = Number of units sold * Selling price per unit = 13,000 * $16 = $208,000

Variable selling expenses = Number of units sold * Variable selling expense per unit = 13,000 * $2 = $26,000

Total selling expenses = Variable selling expenses + Total fixed selling expense = $26,000 + $21,000 = $47,000

Variable administrative expense = Number of units sold * Variable administrative expense per unit = 13,000 * $3 = $39,000

Total administrative expense = Variable administrative expense + Total fixed administrative expense = $39,000 + $15,000 = $54,000

Cost of goods sold =  Beginning merchandise inventory + Merchandise purchases - Ending merchandise inventory = $11,000 + $88,000 - $25,000 = $74,000

The statements are now prepared as follows:

1. Prepare a traditional income statement.

The purpose of the traditional income statement is to obtain the gross margin and the net profit. These can be obtained as follows:

Cherokee Inc.

Traditional income statement

Details                                                      $        

Sales                                                  208,000

Cost of goods sold                            (74,000)

Gross margin                                    134,000

Selling and Admin. Expenses:

Selling expenses                              (47,000)

Administrative expense                   (54,000)  

Net profit                                           33,000  

2. Prepare a contribution format income statement

The purpose of the contribution format income statement is to obtain the contribution margin and the net profit. These can be obtained as follows:

Cherokee Inc.

Contribution format income statement

Details                                                      $        

Sales                                                  208,000

Variable expenses:

Cost of goods sold                            (74,000)

Selling expenses                               (26,000)

Administrative expense                    (39,000)  

Contribution margin                          69,000

Fixed expenses:

Selling expenses                               (21,000)

Administrative expense                    (15,000)  

Net profit                                             33,000  

Note:

Note that under both methods, the net profit is the same. This always holds no matter the method used.

Instructions are below.

Explanation:

Giving the following information:

Amount Number of units sold 13,000

Selling price per unit $16

Variable selling expense per unit $2

Variable administrative expense per unit $3

Total fixed selling expense $21,000

Total fixed administrative expense $15,000

Beginning merchandise inventory $11,000

Ending merchandise inventory $25,000

Merchandise purchases $88,000

First, we need to calculate the cost of goods sold:

COGS= beginning finished inventory + cost of goods manufactured - ending finished inventory

COGS= 11,000 + 88,000 - 25,000= 74,000

1) Traditional income statement:

Sales= 13,000*16= 208,000

COGS= (74,000)

Gross profit= 134,000

Total selling expense= (2*13,000) + 21,000= (47,000)

Total administrative expense= (3*13,000) + 15,000= (54,000)

Net operating income= 33,000

2) Contribution format income statement:

Total variable cost= (3 + 2)*13,000 + 74,000= $139,000

Sales= 208,000

Total variable cost= (139,000)

Contribution margin= 69,000

Total fixed selling expense= (21,000)

Total fixed administrative expense= (15,000)

Net operating income=  33,000

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