Problem 1-19 (Algo) 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 $ 405,000 Beginning merchandise inventory $ 27,000 Purchases $ 270,000 Ending merchandise inventory $ 13,500 Fixed selling expense $ ? Fixed administrative expense $ 16,200 Variable selling expense $ 20,250 Variable administrative expense $ ? Contribution margin $ 81,000 Net operating income $ 24,300 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?

1. $24,300

2.$24,300

3. $405.00

4. $324.00

5.$81.00

6. Contribution format income statement

Explanation:

1. Preparation for the contribution format income statement

Todrick Company contribution format income statement

Sales $405,000

Less VARIABLE EXPENSES:

Cost of good sold ($283,500)

($27,000 + $270,000 - $13,500)

Selling expenses ($20,250)

Variable administrative expense ($20,250)

($405,000 - $283,500 - $81,000-$20,250)

Total $81,000

[$405,000-($283,500+$20,250+$20,250)]

CONTRIBUTION MARGIN:

FIXED EXPENSES:

Selling expenses $16,200

Fixed selling expense $40,500

($81,000-$24,300-$16,200)

Total $56,700

($40,500+$16,200)

NET OPERATING INCOME $24,300

($81,000-$56,700)

Therefore the Net operating income will be $24,300

2. Preparation of the traditional format income statement.

Todrick Company traditional format income statement

Sales $405,000

Less Cost of good sold ($283,500)

($27,000 + $270,000 - $13,500)

Gross margin $121,500

($405,000-$283,500)

Selling and Administrative expenses

Selling expenses $60,750

($40,500+$20,250)

Administrative expense $36,450

($20,250+$16,200)

Total $97,200

NET OPERATING INCOME $24,300

($121,500-$97,200)

Therefore the Net operating income will be $24,300

3. Calculation for the selling price per unit

Using this formula

Selling price per unit = Sales / Units sold

Let plug in the formula

Selling price per unit = $405,000 / 1,000

Selling price per unit = $405.00

Therefore the Selling price per unit will be $405.00

4. Calculation for the variable cost per unit.

Using this formula

Variable cost per unit = Variable expense / Units sold

Let plug in the formula

Variable cost per unit = ($283,500+$20,250+$20,250)/1,000

Variable cost per unit = $324,000 / 1,000

Variable cost per unit = $324.00

Therefore the Variable cost per unit will be $324.00

5. Calculation for the contribution margin per unit using this formula

Contribution Margin per unit = Selling price per unit - Variable cost per unit

Let plug in the formula

Contribution Margin per unit = $405.00 - $324.00

Contribution Margin per unit = $81.00

Therefore the Contribution Margin per unit will be $81.00

6. Based on the above calculation for both contribution format income statement and traditional format income statement the CONTRIBUTION FORMAT INCOME STATEMENT would be more useful to managers because it will enables them to effectively and efficiently estimate how net operating income will tend to change in responses to changes in unit sales.

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