Question

Cost Behavior Prepare income statement in two formats Farnsworth Drycleaners has capacity to clean up to 7,500 garments per month. The following operating data is available for Farnsworth. Amount charged per garment for dry cleaning $10.00 Variable cost per garment $0.70 Fixed costs per month $14,400. Requirements: 1- Using the traditional format, prepare Farnsworth’s projected income statement for July assuming 4,260 garments are cleaned during the month. a. Check your spelling carefully and do not abbreviate. b. Enter all amounts as positive values. Do not use a minus sign or parentheses for any values to be subtracted.
2- Using the contribution margin format, prepare Farnsworth’s projected income statement for July assuming 4,260 garments are cleaned during the month. a. Check your spelling carefully and do not abbreviate. b. Enter all amounts as positive values. Do not use a minus sign or parentheses for any values to be subtracted.

Answer 1

Answer:

(1)

Fees revenues 42,600

Total expenses 1.92 x 4260  = 8179.2

Net income 34,420.8

(2)

Fees revenues 42,600

Variable cost  2,982

Contribution Margin 39,618

Fixed Cost 14,400

Net Income 25,218

Explanation:

(1)

We multiply by the garment cleaned

10 x 4,260 = 42,600

0.7 x 4,260 = 2982

and distribute the fixed cost among the normal capacity

14,400 / 7,500 = 1.92 fixed cost per garment cleaned

.7 + 1.92 = 2.62 cost per garment

(2)

We do not include the fixed cost in the unit cost, we subtact them completely as an expense.