Question

The Rhythm Shop is a large retailer of acoustic, electric, and bass guitars. An income statement for the company’s acoustic guitar department for a recent quarter is presented below:

THE RHYTHM SHOP Income Statement—Acoustic Guitar Department For the Quarter Ended March 31
Sales				$	2,250,000
Cost of goods sold					1,000,000
Gross margin					1,250,000
Selling and administrative expenses:
Selling expenses	$	450,000
Administrative expenses		250,000			700,000
Operating income				$	550,000

The guitars sell, on average, for $900 each. The department’s variable selling expenses are $80 per guitar sold. The remaining selling expenses are fixed. The administrative expenses are 25% variable and 75% fixed. The company purchases its guitars from several suppliers at an average cost of $400 per guitar.

Required:

1. Prepare an income statement for the quarter using the contribution approach.

2. What was the contribution toward fixed expenses and profits from each guitar sold during the quarter? (State this figure in a single dollar amount per guitar.)

3. If The Rhythm Shop sells 150 more guitars in the quarter ending June 30 than it did in the quarter ending March 31, and fixed costs remain the same, by how much will operating income increase?

Answer 1