Question

exercise 1-15 (static) traditional and contribution format income statements lo1-6

the alpine house, incorporated, is a large retailer of snow skis. the company assembled the information shown below for the quarter ended march 31:

	amount
selling price per pair of skis	$ 750
variable selling expense per pair of skis	$ 50
variable administrative expense per pair of skis	$ 10
total fixed selling expense	$ 20,000
total fixed administrative expense	$ 20,000
beginning merchandise inventory	$ 30,000
ending merchandise inventory	$ 40,000
merchandise purchases	$ 100,000

required:

1. prepare a traditional income statement for the quarter ended march 31.
2. prepare a contribution format income statement for the quarter ended march 31.
3. what was the contribution margin per unit?

Explanation:

Calculate units sold and cost of goods sold

To prepare the statements, we first determine the number of units (pairs of skis) sold.
Given:

• \(\text{Sales} = \$150,000\)
• \(\text{Selling price per pair} = \$750\)

$$ \text{Units Sold} = \frac{\$150,000}{\$750} = 200 \text{ pairs} $$

Next, we calculate the Cost of Goods Sold (COGS):

• \(\text{Beginning inventory} = \$30,000\)
• \(\text{Merchandise purchases} = \$100,000\)
• \(\text{Ending inventory} = \$40,000\)

$$ \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} $$

$$ \text{COGS} = \$30,000 + \$100,000 - \$40,000 = \$90,000 $$

Prepare the traditional income statement

The traditional format organizes expenses by function (product vs. period costs):

• \(\text{Gross Margin} = \text{Sales} - \text{COGS} = \$150,000 - \$90,000 = \$60,000\)

Selling and administrative expenses:

• \(\text{Selling expenses} = \text{Variable selling} + \text{Fixed selling}\)
• \(\text{Variable selling} = 200 \text{ units} \times \$50/\text{unit} = \$10,000\)
• \(\text{Fixed selling} = \$20,000\)
• \(\text{Total selling expenses} = \$10,000 + \$20,000 = \$30,000\)
• \(\text{Administrative expenses} = \text{Variable admin} + \text{Fixed admin}\)
• \(\text{Variable admin} = 200 \text{ units} \times \$10/\text{unit} = \$2,000\)
• \(\text{Fixed admin} = \$20,000\)
• \(\text{Total administrative expenses} = \$2,000 + \$20,000 = \$22,000\)

Total selling and administrative expenses:

$$ \$30,000 + \$22,000 = \$52,000 $$

Net operating income:

$$ \text{Net Operating Income} = \text{Gross Margin} - \text{Total Selling and Admin Expenses} = \$60,000 - \$52,000 = \$8,000 $$

Prepare the contribution format income statement

The contribution format organizes expenses by behavior (variable vs. fixed):

• Variable expenses:
• \(\text{Cost of goods sold} = \$90,000\)
• \(\text{Variable selling expense} = 200 \times \$50 = \$10,000\)
• \(\text{Variable administrative expense} = 200 \times \$10 = \$2,000\)
• \(\text{Total variable expenses} = \$90,000 + \$10,000 + \$2,000 = \$102,000\)

• \(\text{Contribution Margin} = \text{Sales} - \text{Total Variable Expenses} = \$150,000 - \$102,000 = \$48,000\)

• Fixed expenses:
• \(\text{Fixed selling expense} = \$20,000\)
• \(\text{Fixed administrative expense} = \$20,000\)
• \(\text{Total fixed expenses} = \$20,000 + \$20,000 = \$40,000\)

• \(\text{Net Operating Income} = \text{Contribution Margin} - \text{Total Fixed Expenses} = \$48,000 - \$40,000 = \$8,000\)

Calculate contribution margin per unit

The contribution margin per unit is calculated by subtracting all variable expenses per unit from the selling price per unit.

• \(\text{Selling price per unit} = \$750\)
• \(\text{Variable cost of goods sold per unit} = \frac{\$90,000}{200} = \$450\)
• \(\text{Variable selling expense per unit} = \$50\)
• \(\text{Variable administrative expense per unit} = \$10\)

$$ \text{Contribution Margin per Unit} = \$750 - (\$450 + \$50 + \$10) = \$750 - \$510 = \$240 $$

Answer:

Question 1: Traditional Income Statement

The Alpine House, Incorporated
For the Quarter Ended March 31
Sales	\$150,000
Cost of goods sold	90,000
Gross margin	60,000
Selling and administrative expenses:
    Selling expenses	\$30,000
    Administrative expenses	22,000	52,000
Net operating income	\$8,000

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Question 2: Contribution Format Income Statement

The Alpine House, Incorporated
For the Quarter Ended March 31
Sales	\$150,000
Variable expenses:
    Cost of goods sold	\$90,000
    Variable selling expense	10,000
    Variable administrative expense	2,000	102,000
Contribution margin	48,000
Fixed expenses:
    Fixed selling expense	20,000
    Fixed administrative expense	20,000	40,000
Net operating income	\$8,000

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Question 3: Contribution Margin Per Unit

The contribution margin per unit is \$240 per pair of skis.