Question

Milden Company is a merchandiser that plans to sell 29,000 units during the next quarter at a selling price of $57 per unit. The company also gathered the following cost estimates for the next quarter: Cost Cost Formula Cost of good sold $27 per unit sold Advertising expense $177,000 per quarter Sales commissions 6% of sales Shipping expense $75,000 per quarter + $4.00 per unit sold Administrative salaries $87,000 per quarter Insurance expense $9,700 per quarter Depreciation expense $57,000 per quarter Required: 1. Prepare a contribution format income statement for the next quarter. 2. Prepare a traditional format income statement for the next quarter.

Answer 1

1. Contribution format income statement for the next quarter.

Sales ( 29,000 units x $57) $1,653,000

Less Variable Costs

Cost of Sales ( 29,000 units × $27) $783,000

Sales commissions (6% x $1,653,000) $99,180

Shipping expense : Variable ($4.00 x 29,000 units) $116,000 ($998,180)

Contribution $654,820

Less Fixed Costs

Advertising expense ( $177,000)

Shipping expense : Fixed ($75,000)

Administrative salaries ($87,000)

Insurance expense ($9,700)

Depreciation expense ($57,000)

Net Profit $249,120

2. Traditional format income statement for the next quarter.

Sales ( 29,000 units x $57) $1,653,000

Less Cost of Sales ( 29,000 units × $27) ($783,000)

Gross Profit $870,000

Less Expenses

Sales commissions (6% x $1,653,000) ( $99,180)

Shipping expense : Variable ($4.00 x 29,000 units) ($116,000)

Advertising expense ( $177,000)

Shipping expense : Fixed ($75,000)

Administrative salaries ($87,000)

Insurance expense ($9,700)

Depreciation expense ($57,000)

Net Profit $249,120

Step-by-step explanation:

A contribution format income statement calculates Contribution. This is arrived at by deducting Variable Costs to Provide a Sale from Sales Revenue. All the other costs (Fixed Costs) are treated as Period Costs and are Expensed in the Income Statement.

Where as traditional format income statement calculates Gross Profit. This is arrived at by deducting Cost of Sales from Sales Revenue. All other expenses are placed in the Income Statement.