Chapter 1, Problem 15E

Traditional and Contribution Format Income Statements.
The Alpine House, Inc., is a large retailer of snow skis. The company assembled the information shown below for the quarter ended March 31:

Required:
1. Prepare a traditional income statement for the quarter ended March 31.
2. Prepare a contribution format income statement for the quarter ended March 31.
3. What was the contribution margin per unit?

To determine

Traditional Income Statement

• Traditional Income Statement records the costs of goods manufactured for a particular reporting period by classifying the costs into direct and indirect costs

• Direct costs are variable in nature. Examples: Direct Materials, Direct Labor etc.

• Indirect costs are costs incurred for selling and administrative purposes such as Salary of staff, warehouse rent etc.

• The profit or loss of operations is carried forward to the next period

To Prepare:

Traditional Income Statement for the quarter ended 31 March

Answer to Problem 15E

Solution:

Particulars	Amount	Particulars	Amount
Beginning Merchandise Inventory	$30,000	Sales	$150,000
Merchandise Purchases	$100,000	Ending Merchandise Inventory	$40,000
Variable Selling Expense	$10,000
Fixed Selling Expense	$20,000
Variable Administrative Expense	$2,000
Fixed Administrative Expense	$20,000
Profit	$8,000
	$190,000		$190,000

Explanation of Solution

• Given: Sales = $150,000

  Sales Price per unit = $750

  Variable Selling Expense per unit = $50

  Variable Administrative Expense per unit = $10

Formula Used:

$Unitsproduced=\frac{TotalSales}{SalesPriceperunit}$

  $VariableSellingExpense=VariableSellingExpenseperunit\times UnitsProduced$

  $VariableAdministrativeExpense=VariableAdministrativeExpenseperunit\times UnitsProduced$

• Calculations:

$Unitsproduced=\frac{\$150,000}{\$750}=200Units$

Variable Selling Expense = 200 @$50 = $10,000

Variable Administrative Expense = 200 @$10 = $2,000

• Variable costs are costs that are impacted by the volume of goods produced and have a direct correlation with the number of goods produced.

• Fixed costs are costs that have to be incurred irrespective of the volume of goods produced.

• The costs and revenues are recorded in the income statement for the quarter ended 31 March

• The costs consist of the Variable as well as Fixed costs and the cost of purchases

• The difference in the Beginning and Ending Inventory is also considered for calculation of Profit or Loss

Conclusion

Hence the traditional income statement for the quarter ended 31 March is prepared.

To determine

Contribution and Fixed and Variable Costs in Manufacturing

• Variable costs refer to the costs of manufacture that have a direct co-relation with the volume of the goods manufactured, i.e. the costs increase with an increase in the goods produced.

• Examples are costs of direct material and direct labor.

• Fixed costs refer to the costs of manufacture that have an inverse co-relation with the volume of the goods manufactured, i.e. the costs decrease with an increase in the goods produced.

• Examples are costs of factory rent, depreciation on plant and equipment

• Manufacturing costs are costs that are directly incurred in connection with manufacture of goods.

• Examples are Direct materials and Manufacturing Overhead

• Contribution is the difference between the Sales revenue and the Variable cost per unit. This is an indicator of the contribution of the goods manufactured to the profit and bottom line of the organization.

To Prepare:

Contribution Income statement for the quarter ended 31 March

Answer to Problem 15E

Solution:

Particulars	Per unit	Total
Sales	750	150000
Direct Materials	500	$100,000
Variable Selling Expense	50	$10,000
Variable Administrative Expense	10	$2,000
Contribution	190	$38,000
Fixed Selling Expense		$20,000
Fixed Administrative Expense		$20,000
Profit / (Loss)		($2,000)

Explanation of Solution

• Given:

Sales = $150,000

Sales Price per unit = $750

Variable Selling Expense per unit = $50

Variable Administrative Expense per unit = $10 Purchases = $100,000

• Formula Used:

$Unitsproduced=\frac{TotalSales}{SalesPriceperunit}$

  $VariableSellingExpense=VariableSellingExpenseperunit\times UnitsProduced$

$VariableAdministrativeExpense=VariableAdministrativeExpenseperunit\times UnitsProduced$

  $DirectMaterialsperunit=\frac{Purchases}{UnitsProduced}$

  $Contribution=Sales–DirectMaterials-VariableCosts$

Calculations:

$Unitsproduced=\frac{\$150,000}{\$750}=200Units$

Variable Selling Expense = 200 @$50 = $10,000

Variable Administrative Expense = 200 @$10 = $2,000

Direct Materials = $100,000 / 200 = $500 per unit

Contribution = $150,000 - $100,000 - $10,000 - $2,000 = $38,000

• Variable costs are costs that are impacted by the volume of goods produced and have a direct correlation with the number of goods produced.

• Fixed costs are costs that have to be incurred irrespective of the volume of goods produced.

• The costs considered for calculation of contribution are variable costs.

• Contribution is the difference between the Sales and Variable Costs including cost of Materials

Conclusion

Hence the contribution format income statement has been prepared for the quarter ended 31 March.

To determine

Contribution and Fixed and Variable Costs in Manufacturing

• Variable costs refer to the costs of manufacture that have a direct co-relation with the volume of the goods manufactured, i.e. the costs increase with an increase in the goods produced.

• Examples are costs of direct material and direct labor.

• Fixed costs refer to the costs of manufacture that have an inverse co-relation with the volume of the goods manufactured, i.e. the costs decrease with an increase in the goods produced.

• Examples are costs of factory rent, depreciation on plant and equipment

• Manufacturing costs are costs that are directly incurred in connection with manufacture of goods.

• Examples are Direct materials and Manufacturing Overhead

• Contribution is the difference between the Sales revenue and the Variable cost per unit. This is an indicator of the contribution of the goods manufactured to the profit and bottom line of the organization.

Contribution Margin Per unit

Answer to Problem 15E

Solution:

The contribution Margin per unit is $190

Explanation of Solution

Sales = $150,000

Sales Price per unit = $750

Variable Selling Expense per unit = $50

Variable Administrative Expense per unit = $10 Purchases = $100,000

Formula Used:

  $Unitsproduced=\frac{TotalSales}{SalesPriceperunit}$

  $VariableSellingExpense=VariableSellingExpenseperunit\times UnitsProduced$

  $VariableAdministrativeExpense=VariableAdministrativeExpenseperunit\times UnitsProduced$

  $DirectMaterialsperunit=\frac{Purchases}{UnitsProduced}$

  $Contribution=Sales–DirectMaterials-VariableCosts$

  $Contributionperunit=\frac{Contribution}{UnitsProduced}$

Calculations:

  $Unitsproduced=\frac{\$150,000}{\$750}=200Units$

Variable Selling Expense = 200 @ $50 = $10,000

Variable Administrative Expense = 200 @$10 = $2,000

Direct Materials = $100,000 / 200 = $500 per unit

Contribution = $150,000 - $100,000 - $10,000 - $2,000 = $38,000

Particulars	Per unit	Total
Sales	750	150000
Direct Materials	500	$100,000
Variable Selling Expense	50	$10,000
Variable Administrative Expense	10	$2,000
Contribution	190	$38,000

• The costs considered for calculation of contribution are variable costs.

• Contribution is the difference between the Sales and Variable Costs including cost of Materials

• Contribution per unit is the total Contribution divided by the Units Produced.

Conclusion

Hence the Contribution margin per unit is calculated.