Question

Shown here is an income statement in the traditional format for a firm with a sales volume of 18,000 units:

Revenues	$	144,000
Cost of goods sold ($9,000 + $2.80/unit)		59,400
Gross profit	$	84,600
Operating expenses:
Selling ($2,250 + $0.85/unit)		17,550
Administration ($4,900 + $0.35/unit)		11,200
Operating income	$	55,850

Required:

1. Prepare an income statement in the contribution margin format.
2. Calculate the contribution margin per unit and the contribution margin ratio.
3. Calculate the firm's operating income (or loss) if the volume changed to

1. 23,000 units.
2. 10,000 units.

4. Refer to your answer to part a when total revenues were $144,000. Calculate the firm's operating income (or loss) if unit selling price and variable expense per unit do not change and total revenues

1. Increase by $13,500.
2. Decrease by $7,500.

Answer 1

Contribution format Income statement
Sales	144,000
Less: Variable costs
Cost of goods sold	50,400
Selling expenses	15,300
Admin expenses	6,300
Total variable costs	72,000
Contribution Margin	72,000
Less: Fixed costs
Cost of goods sold	9,000
Selling expenses	2,250
Admin expenses	4,900
Total fixed costs	16,150
Net operating income	55,850
Contribution Margin per unit	4
CM Ratio	50%
Operating income at 23000 units = 23000*4 - 16150 = $75,850
Operating income at 10000 units = 10000*4 - 16150 = $23,850
Operating income when revenue increases by $13500 = (144000+13500)*50% - 16150 = $62,600
Operating income when revenue decreases by $7500 = (144000-7500)*50% - 16150 = $52,100

Α B 144000 = 2.8*18000 =0.85*18000 =0.35*18000 =SUM(B4:36) =B2-B7 1 Contribution format Income statement 2 Sales 3 Less: Variable costs 4. Cost of goods sold 5 Selling expenses 6 Admin expenses 7 Total variable costs 8 Contribution Margin 9 Less: Fixed costs 10 Cost of goods sold 11 Selling expenses 12 Admin expenses 13 Total fixed costs 14 Net operating income 15 16 Contribution Margin per unit 17 CM Ratio 9000 2250 4900 =SUM(B10:B12) =B8-B13 =B8/18000 =B8/B2 18 19 Operating income at 23000 units = 23000*4 - 16150 = $75,850 20 Operating income at 10000 units = 10000*4 - 16150 = $23,850 21 22 Operating income when revenue increases by $13500 = (144000+13500)*50% - 16150 = $62,600 23 Operating income when revenue decreases by $7500 = (144000-7500)*50% - 16150 = $52,100