Answer:
1. Gross margin is $134,00; and Net profit is $33,000.
2. Contribution margin is $69,000; and Net profit is $33,000.
Explanation:
To prepare the statements, the following calculations are done first:
Sales revenue = Number of units sold * Selling price per unit = 13,000 * $16 = $208,000
Variable selling expenses = Number of units sold * Variable selling expense per unit = 13,000 * $2 = $26,000
Total selling expenses = Variable selling expenses + Total fixed selling expense = $26,000 + $21,000 = $47,000
Variable administrative expense = Number of units sold * Variable administrative expense per unit = 13,000 * $3 = $39,000
Total administrative expense = Variable administrative expense + Total fixed administrative expense = $39,000 + $15,000 = $54,000
Cost of goods sold = Beginning merchandise inventory + Merchandise purchases - Ending merchandise inventory = $11,000 + $88,000 - $25,000 = $74,000
The statements are now prepared as follows:
1. Prepare a traditional income statement.
The purpose of the traditional income statement is to obtain the gross margin and the net profit. These can be obtained as follows:
Cherokee Inc.
Traditional income statement
<u>Details $ </u>
Sales 208,000
Cost of goods sold <u> (74,000) </u>
Gross margin 134,000
Selling and Admin. Expenses:
Selling expenses (47,000)
Administrative expense <u> (54,000) </u>
Net profit <u> 33,000 </u>
2. Prepare a contribution format income statement
The purpose of the contribution format income statement is to obtain the contribution margin and the net profit. These can be obtained as follows:
Cherokee Inc.
Contribution format income statement
<u>Details $ </u>
Sales 208,000
Variable expenses:
Cost of goods sold (74,000)
Selling expenses (26,000)
Administrative expense <u> (39,000) </u>
Contribution margin 69,000
Fixed expenses:
Selling expenses (21,000)
Administrative expense <u> (15,000) </u>
Net profit <u> 33,000 </u>
Note:
Note that under both methods, the net profit is the same. This always holds no matter the method used.
