Problem 1-25 Traditional and Contribution Format Income Statements [LO1-6] Milden Company is a merchandiser that plans to sell 33,000 units during the next quarter at a selling price of $55 per unit. The company also gathered the following cost estimates for the next quarter: Cost Cost Formula Cost of good sold $25 per unit sold Advertising expense $182,000 per quarter Sales commissions 5% of sales Shipping expense $32,000 per quarter $5.00 per unit sold Administrative salaries $92,000 per quarter Insurance expense $10,200 per quarter Depreciation expense $62,000 per quarter Required: 1. Prepare a contribution format income statement for the next quarter. 2. Prepare a traditional format income statement for the next quarter.

Milden Company

Traditional and Contribution Format Income Statements

1. A contribution format income statement for the next quarter:

Sales Revenue                            $1,815,000

less variable costs:

Cost of goods sold   $825,000

Sales commission         90,750

Shipping costs             165,000  1,080,750

Contribution                                $734,250

Fixed costs:

Shipping cost                 32,000

Advertising expense    182,000

Administrative salaries 92,000

Insurance expense       10,200

Depreciation expense 62,000   378,200

Net income                               $356,050

2. A traditional format income statement for the next quarter:

Sales Revenue                            $1,815,000

Cost of goods sold                         825,000

Gross profit                                  $990,000

Period costs:

Shipping costs               197,000

Sales commission          90,750

Advertising expense    182,000

Administrative salaries 92,000

Insurance expense       10,200

Depreciation expense 62,000   633,950

Net income                                $356,050

Explanation:

a) Data and Calculations:

Estimated sales units during the next quarter = 33,000

Selling price per unit = $55

Sales revenue = $1,815,000

Cost of goods sold = $825,000 ($25 * 33,000)

Sales commission = $90,750 ($1,815,000 * 5%)

Shipping expense:

Fixed element = $32,000

Variable cost =    165,000 ($5 * 33,000)

Total shipping expense = $197,000

Other fixed costs per quarter:

Advertising expense = $182,000

Administrative salaries $92,000

Insurance expense $10,200

Depreciation expense $62,000

b) With the contribution format income statement, all the variable costs (recognized as product costs) are deducted from revenue in order to determine the contribution margin before deducting the fixed costs.  The traditional format income statement does not compute contribution.  But it determines the gross profit, which is the difference between sales revenue and cost of goods sold.  Each method results in the same amount of net income, especially in the absence of inventories.

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