Traditional and Contribution Format Income Statements

Cherokee Inc. is a merchandiser that provided the following

information:
Amount
Number of units sold . . . . . . . . . . . . . . . . . . . . . 20,000 Less:
Selling price per unit . . . . . . . . . . . . . . . . . . . . . $30
Variable selling expense per unit . . . . . . . . . . . . $4 Add:
Variable administrative expense per unit . . . . . . $2
Total fixed selling expense . . . . . . . . . . . . . . . . . $40,000 Less:
Total fixed administrative expense . . . . . . . . . . . $30,000
Beginning merchandise inventory . . . . . . . . . . . . $24,000
Ending merchandise inventory . . . . . . . . . . . . . . $44,000 Less:
Merchandise purchases . . . . . . . . . . . . . . . . . . . $180,000

Required:
1. Prepare a traditional income statement.
2. Prepare a contribution format income statement.

less

Less
Sales (20000x 30) $600,000
Cost og Goods Sold
Inventory opening $24,000
Purchases $180,000
Goods available for sale $204,000
Inventory ending -44000
Cost og Goods Sold $160,000
Gross Profit $440,000
Operating Expenses
variable selling exp (4x 20000) $80,000
Variable admin exp (2 x 20000) $40,000
Fixed selling $40,000
Fixed admin exp $30,000 $190,000
Operating income $250,000

Sales (20000x 30) $600,000

Variable expenses
Cost of goods sold $160,000
Selling expense $80,000
Admin expenses $40,000 $280,000
Contribution margin $320,000
Fixed Expenses
Fixed selling 40000
Fixed admin exp 30000 70000
Operating Margin $250,000
Harris Company manufactures and sells a single product. A
partially completed schedule of the company’s total and per unit
costs over the relevant range of 30,000 to 50,000 units produced
and sold annually is given below:
Units Produced and Sold
30,000 40,000 50,000 30,000
Total costs: Total costs:
Variable costs $180,000 ? ? Variable costs $180,000
Fixed costs ? ? Fixed costs 300,000
Total costs $480,000 ? ? Total costs $480,000
Cost per unit: Cost per unit:
Variable cost ? ? ? Variable cost $6
Fixed cost ? ? ? Fixed cost 10
Total cost per unit ? ? ? Total cost per unit $16
Required:
1. Complete the schedule of the company’s total and unit costs
above.
 40,000 50,000

$240,000 $300,000
300,000 300,000
$540,000 $600,000

$6 $6
7.5 6
13.50 12.00
Nova Company’s total overhead cost at various levels of activity are
presented below: Part 1
Month Machine-Hours Total Overhead Cost Utilities
April 70,000 $198,000 Salary
May 60,000 $174,000 Maintainance
June 80,000 $222,000 Total Over head
July 90,000 $246,000
Assume that the total overhead cost above consists of utilities, supervisory Part 2
salaries, and maintenance. The breakdown of these costs at the 60,000
machine-hour level of activity is: July
Utilities (variable) $48,000 May
Supervisory salaries (fixed) 21,000 Difference
Maintenance (mixed) 105,000
Total overhead cost $174,000
Nova Company’s management wants to break down the maintenance cost per Hour
into its variable and fixed cost elements.
Required:
1. Estimate how much of the $246,000 of overhead cost in July was
maintenance cost. (Hint: to do this, it may be helpful to first determine how
much of the $246,000 consisted of utilities and supervisory salaries. Think
about the behavior of variable and fixed costs!) Part 3
2. Using the high-low method, estimate a cost formula for maintenance. Utilities
3. Express the company’s total overhead cost in the linear equation form Y = Salaries
a + bX. maintance
4. What total overhead cost would you expect to be incurred at an activity
level of 75,000 machine-hours?

Y= a+bX

Part 4 bxX
a
Y

Maintance
Salaries
Uitilities
 M/H
0.8 72000
21,000
Maintainance 153000
otal Over head 246000

Units Maintenance Cost

90000 153000
60000 105000
30000 48000

48000/ 30000
1.6

Y= a+bX
9000+(1.6 x 90000)

Vriable Fixed
0.8
21000
1.6 9000
2.4 30000
b a

Y=30000+(2.4xX)

2.4 x 75000 180000

30000
210000

129000
21000
60000
210000