Question

Exercise 19-8  Contribution margin format income statement  P2

Polarix is a retailer of ATVs (all-terrain vehicles) and accessories. An income statement for its Consumer ATV Department for the current year follows. ATVs sell for $3,800 each. Variable selling expenses are $270 per ATV. The remaining selling expenses are fixed. Administrative expenses are 40% variable and 60% fixed. The company does not manufacture its own ATVs; it purchases them from a supplier for $1,830 each.

POLARIX Income Statement—Consumer ATV Department For Year Ended December 31, 2017
Sales		$646,000
Cost of goods sold		311,100
Gross margin		334,900
Operating expenses
Selling expenses	$135,000
Administrative expenses	59,500	194,500
Net income		$140,400

1. Prepare an income statement for this current year using the contribution margin format.
2. For each ATV sold during this year, what is the contribution toward covering fixed expenses and earning income?

Check (2) $1,560

Answer 1

Requirement 1:

Income Statement

Particulars	$	$
Sales		646,000
Less: Variable Expenses
Variable cost of goods sold (170 Units * $1,830 per unit)	311,100
Variable Selling expenses (170 Units * $270 per unit)	45,900
Variable Administrative expenses ($59,500 * 40%)	23,800
Total Variable Expenses		380,800
Contribution Margin		265,200
Less: Fixed Expenses
Fixed Selling Expenses ($135,000 - $45,900)	89,100
Fixed Administrative Expenses ($59,500 * 60%)	35,700
Total Fixed Expenses		124,800
Net Income		140,400

Working Notes:

Number of units sold = $646,000 / $3,800 per unit = 170 Units

Requirement 2:

Contribution Margin per unit = Selling price per unit - Variable expenses per unit

Total Variable expenses per unit = $380,800 / 170 Units = $2,240

Contribution Margin per unit = $3,800 - $2,240 = $1,560

All the best...