Question

Patty's Quilt Shoppe sells homemade Amish quilts. Patty buys the quilts from local Amish artisans for $220 each, and her shop sells them for $320 each. She also pays a sales commission of 8% of sales revenue to her sales staff. Patty leases her country-style shop for $1,700 per month and pays $1,800 per month in payroll costs in addition to the sales commissions. Patty sold 95 quilts in February. Prepare Patty's traditional income statement and contribution margin income statement for the month. Prepare the traditional income statement for the month.

Answer 1

Traditional Income Statement:

• Total Sales Revenue: $320 x 95 = $30,400
• Total Cost of Goods Sold: $220 x 95 = $20,900
• Operating Expenses: $1,700 + $1,800 + (8% x $30,400) = $6,518
• Net Income: Total Sales Revenue - Total Cost of Goods Sold - Operating Expenses = $30,400 - $20,900 - $6,518 = $2,982

Contribution Margin Income Statement:

• Sales Revenue: $320 x 95 = $30,400
• Cost of Goods Sold: $220 x 95 = $20,900
• Contribution Margin: Sales Revenue - Cost of Goods Sold = $30,400 - $20,900 = $9,500
• Operating Expenses: $1,700 + $1,800 + (8% x $30,400) = $6,518
• Operating Income: Contribution Margin - Operating Expenses = $9,500 - $6,518 = $2,982

Step-by-step explanation:

To prepare Patty's traditional income statement, we need to calculate the total sales revenue, total cost of goods sold, and total operating expenses. Total sales revenue can be calculated by multiplying the selling price per quilt ($320) by the number of quilts sold (95). Total cost of goods sold is calculated by multiplying the purchase price per quilt ($220) by the number of quilts sold. Total operating expenses include the lease cost, payroll cost, and sales commissions.

To prepare Patty's contribution margin income statement, we need to calculate the contribution margin, which is the difference between the sales revenue and the cost of goods sold. The contribution margin can be calculated by subtracting the total cost of goods sold from the total sales revenue. Operating expenses are deducted from the contribution margin to calculate the operating income.