Cherokee Inc. is a merchandiser that provided the following information: Amount
Number of units sold 11,000
Selling price per unit $16
Variable selling expense per unit $1
Variable administrative expense per unit $1
Total fixed selling expense $22,000
Total fixed administrative expense $15,000
Beginning merchandise inventory $9,000
Ending merchandise inventory $26,000
Merchandise purchases $87,000
Required:
1. Prepare a traditional income statement.
2. Prepare a contribution format income statement.

Results are below.

Explanation:

The difference between the traditional format and the contribution format is that the latter incorporates all variable components in the cost of goods sold (total variable cost).

Traditional format income statement:

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

COGS= 9,000 + 87,000 - 26,000

COGS= $70,000

Sales= 11,000*16= 176,000

COGS= (70,000)

Gross profit= 106,000

Total selling expense= (1*11,000) + 22,000= (33,000)

Total administrative expense= (1*11,000) + 15,000= (26,000)

Net operating income= 47,000

Now, the contribution format:

Total variable cost= COGS + variable selling expense + variable administrative expense

Total variable cost= 70,000 + 11,000 + 11,000

Total variable cost= $92,000

Sales= 176,000

Total variable cost= (92,000)

Contribution margin= 84,000

Total fixed selling expense= (22,000)

Total fixed administrative expense= (15,000)

Net operating income= 47,000

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