Question

The accountant of a local retailer prepared the following income statement for this month:

Sales revenue		$600,000
Cost of goods sold		$250,000
Gross margin		$350,000
Less operating expenses
Selling expense	$73,000
Administrative expense	$65,000	$138,000
Net operating income		$212,000

The retailer sells its coats for $150 each. Selling expenses consist of a commission of $5 per coat plus fixed costs. Each coat costs $62.50 from the distributor. Administrative expenses consist of a variable component equal to 5% of sales plus fixed costs. In order to increase net operating income in the coming year, management is considering increasing advertising expenses.

What would be the total contribution margin reported on this retailer’s contribution format income statement?

Answer 1

Number of units sold = Sales revenue/Price per unit

= 600,000/150

= 4,000

Variable selling expense = Number of units sold x Commission per unit

= 4,000 x 5

= $20,000

Variable administrative expense = 5% of sales

= 600,000 x 5%

= $30,000

Contribution format income statement

Sales	600,000
Variable expense :
Cost of goods sold	-250,000
Administrative expense	-30,000
Selling expense	-20,000
Contribution margin	$300,000

Contribution margin = $300,000

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