Question

Martha’s Quilt Shop sells homemade quilts. Martha buys the quilts from local artisans for $300 each and sells them in her shop for $500 each. Martha pays a sales commission of 4% of sales revenue to her sales staff. Martha pays $6,000 in rent each month and pays $1,900 per month in payroll expenses in addition to the sales commissions. Martha sold 250 quilts in March. Martha’s Quilt Shop prepares her income statement using both the traditional method and the contribution margin method. What is Martha’s Quilt Shop’s March net income under these two methods?

Answer 1

Answer:

$37,100

Explanation:

the traditional method:

total revenue = $500 x 250 quilts =                   $125,000

- COGS =                                                               ($75,000)

gross profit =                                                          $50,000

- sales commissions = $500 x 4% x 250 quilts = ($5,000)

- rent =                                                                     ($6,000)

- salaries =                                                               ($1,900)

net profit                                                                 $37,100

contribution approach:

total revenue = $500 x 250 quilts =                   $125,000

- variable product costs = $300 x 250 =            ($75,000)

- sales commissions = $500 x 4% x 250 quilts = ($5,000)

contribution margin =                                            $45,000

fixed administrative expenses =                           ($7,900)

net profit =                                                               $37,100

Answer 2

Answer:

Martha’s Quilt Shop’s gross margin for March is = $50000.

Explanation:

Gross margin = Sales revenues- Cost of goods sold

= ($500 per unit*250 units)- ($300 per unit*250 units)

= $125000-$75000

= $50000