Cherokee Inc. is a merchandiser that provided the following information: Amount Number of units sold 20,000 Selling price per unit $ 30 Variable selling expense per unit $ 4 Variable administrative expense per unit $ 2 Total fixed selling expense $ 40,000 Total fixed administrative expense $ 30,000 Beginning merchandise inventory $ 24,000 Ending merchandise inventory $ 44,000 Merchandise purchases $ 180,000. Required: 1) Prepare a traditional income statement. 2) Prepare a contribution format income statement.

1) Traditional Income Statement

Particulars Value Total Amount

Sales 20,000 units @ $30 = $600,000

Less: Manufacturing Expenses

Cost of goods sold $24,000 + $180,000 - $44,000 $160,000

Gross Margin $440,000

Less: Operating Expenses

Administrative Expense $70,000

Selling expense $120,000 $190,000

Operating Income $250,000

Note: In traditional statement fixed and variable are not segregated and only direct cost associated is subtracted to calculate cost of goods sold, then gross margin is calculated. After that selling and administration expenses are deducted to calculate net operating income.

2) Contribution format income Statement

Particulars Total Amount

Sales 20,000 units @ $30 = $600,000

Less : Variable Costs

Cost of goods sold $24,000 + $180,000 - $44,000 $160,000

Variable selling expense $4 X 20,000 $80,000

Variable Administrative Cost $2 X 20,000 $40,000

Contribution Margin $320,000

Less: Fixed Cost

Fixed Selling expense $40,000

Fixed Administration Expense $30,000

Net operating Income $250,000

Note: In contribution statement fixed and variable expenses are segregated and firstly after deducting variable expense contribution margin on sales is calculated, and then after that deducting fixed cost we get net operating income.