Precious Pets is a specialty pet gift store selling exotic pet-related items thr

Question

Precious Pets is a specialty pet gift store selling exotic pet-related items through its website.

has no physical store; all sales are through its website. Results for last year are shown next:

PRECIOUS PETS

TRADITIONAL INCOME STATEMENT (ABSORPTION COSTING)

FOR THE YEAR ENDED DECEMBER 31

Sale Revenues                                                              $987,000

Less: Cost of Goods Sold                                              $665,000

                                                                                    ______________

Gross Profit                                                                  $322,000

Less Operating expenses:

Selling and Marketing expenses             $65,000

Website Maintenance expenses             $60,500

Other Operating expenses                     $18,200             $143,700

                                                         _________          __________

Operating Income                                                           $178,300

For internal planning and decision-making purposes, the owner of the Precious Pets

would like to translate the company's income statement into the contribution margin format. Since

Precious Pets is web-based, all of its cost of goods sold is variable. A large portion of the selling and marketing expenses consists of freight-out charges

($ 20,200), which were also variable. Only 20% of the remaining selling and marketing expenses and 25% of the website expenses were variable. Of the other operating expenses, 90% were fixed. Based on this information, prepare Precious Pets'

contribution margin income statement for last year.

Explanation / Answer

Precious pet Contribution margin income Statement Particulars Amount in $ Amount in $ Sales revenue $       9,87,000 Less: variable cost Cost of goods sold (100% variable) $       6,65,000 freight out charges $           20,200 other varible selling & marketing expenses 20% (65000-$20200) $             8,960 Website expenses (25% *$60500) $           15,125 varible portion of other operating expenses 10%*$18200 $             1,820 $       7,11,105 contribution margin $       2,75,895 less: Fixed Expenses Fixed selling & marketing expenses 80% (65000-$20200) $           35,840 Fixed Website expenses 75% *$60500 $           45,375 Fixed other Operating expenses 90%*$18200 $           16,380 $           97,595 Operating Income $       1,78,300

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