EXERCISE3-4 Contribution Format Income Statement [L04] The Alpine House, Inc., i

Question

EXERCISE3-4 Contribution Format Income Statement [L04]
The Alpine House, Inc., is a large retailer of winter sports equipment. An in
pany's Ski Department for a recent quarter is presented below:
The Alpine House, Inc.
Income Statement-Ski Department
For the Quarter Ended March 31
Sales . $150,000
Cost of goods sold . 90,000
Gross margin . 60,000
Selling and administrative expenses:
Selling expenses .$30,000
Administrative expenses .10,000 40,000
Net operating income . $ 20,000

Skis sell, on the average, for $750 per pair. Variable selling expenses are $50 per pair of skis sold. The remaining selling expenses are fixed. The administrative expenses are 20% variable and 80% fixed. Thecompany does not manufacture its own skis; it purchases them from a supplier for $450 per pair.
Required:
1. Prepare a contribution format income statement for the quarter.
2. For every pair of skis sold during the quarter, what was the contribution toward covering fixed and toward earning profits?

Explanation / Answer

1)The Contribution Format income statement is Prepared as: Sales $150,000 (-)Cost of goods sold $90,000 ------------------ Gross profit on sales $60,000 Selling and administrative expenses: (-)Selling expenses $30,000 (-)Administrative expenses $10,000 ------------------ Income from operations $20,000 (or) Net operating income 2) From the above given information, Selling price =$750 per pair Variable Cost= $50 per pair Number of units = Sales / Selling price per unit = $150,000 / $750 = 200 units Let us consider 1 unit = 1 pair The administrative expenses are 20% variable and 80% fixed. Therefore, out of the total administrative expenses $10,000 Variable expenses are 20% on $10,000 = $2,000 Fixed expenses are 80% on $10,000 = $8,000 Variable expenses per unit = $2,000 / 200 units = $10 per unit Total variable expenses per unit are $50 + $450 + $10 = $510 Total selling expenses per unit are $750 Contribution margin per unit = selling price per unit - Variable cost per unit = $750 - $510 = $240 Contribution margin ratio = Contribution margin per unit / Selling price per unit = $240 / $750 = 0.32 or 32% Therefore, the above obtained value 32% means that fixed costs and profit represents 32% of the sales.

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