Redhawk, Inc., is a merchandiser that provided the following information: Number

Question

Redhawk, Inc., is a merchandiser that provided the following information:

Number of units sold
13,000

Selling price per unit

$16

Variable selling expense per unit

$1
Variable administrative expense per unit

$1.5
Total fixed selling expense

$18,000

Total fixed administrative expense

$15,000

Merchandise inventory, beginning balance

$10,000

Merchandise inventory, ending balance

$25,000

Merchandise purchases
$85,000

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

Explanation / Answer

1) A traditional income statement would differ depending on whether a business was service-oriented, a merchandiser, or a manufacturer. The manufacturing company transforms raw material into finished goods through the use of labor and factory facilities and a merchandising company, such as a retail furniture store which buys finished furniture and sells it in the same form i.e sells the goods it buys without changing the basic form. The income statement which is prepared by a merchandising concern needs no calculations of cost of goods manufactured. But the income statements prepared by the manufacturing concern requires the calculations for the cost of goods manufactured. So the financial statements prepared by a manufacturing company are more complex than the statements prepared by a merchandising company. The manufacturer company involves many costs that the merchandisers do not have. It is clear that the manufacturing company will have a more complex and varied cost components vs. a merchandiser and a service organization. 2) A contribution income statement breaks costs down between variable costs and fixed costs. A variable cost is a cost that changes with the level of production. A fixed cost is a cost that is constant no matter what the level of production. Contribution income statements are only appropriate for internal use. ns 1 Calculate sales for the period. Sales equals the price of an item times the number of items sold. "Sales" is the first line on the contribution income statement. For example, Firm A only sells one widget product. During the year they sold 50,000 widgets for $5 each. "Sales" for the year then is $250,000 or 50,000 units times $5 per unit. 2 Determine the variable costs for the period. Variable costs are costs which change with the units produced during the period. For example, the more units a company will produce, the more labor costs the company will pay. That makes labor a variable cost in this example. "Total Variable Costs" is the second line on the contribution income statement. In the example, Firm A calculated "Total Variable Costs" for the year as $100,000.

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