The Rhythm Shop is a large retailer of acoustic, electric, and bass guitars. An
ID: 2491186 • Letter: T
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 guitars sell, on average, for $900 each. The department’s variable selling expenses are $84 per guitar sold. The remaining selling expenses are fixed. The administrative expenses are 30% variable and 70% fixed. The company purchases its guitars from several suppliers at an average cost of $400 per guitar.
a)Prepare an income statement for the quarter using the contribution approach.
THE RHYTHM SHOP
Income Statement—Acoustic Guitar Department
For the Quarter Ended March 31
variable expenses
fixed expenses
b)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.)
contribution margin per guitar
c)
If The Rhythm Shop sells 190 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?
operating income increased by
THE RHYTHM SHOPIncome Statement—Acoustic Guitar Department
For the Quarter Ended March 31 Sales $ 2,610,000 Cost of goods sold 1,160,000 Gross margin 1,450,000 Selling and administrative expenses: Selling expenses $ 490,000 Administrative expenses 290,000 780,000 Operating income $ 670,000
Explanation / Answer
THE RHYTHM SHOP
Income Statement—Acoustic Guitar Department
For the Quarter Ended March 31
Sales 2,610,000
Less Variable Cost
a. Cost of goods sold 1,160,000
b. Variable selling exp 243,600
c. Variable Admn. exp. 87,000 1,490,600
------------------- --------------------
Contribution 1,119,400
Less: Fixed cost (246,400+203,000) 449,400
---------------------
Profit 670,000
==================
2. Contibution per guitar = $ 386
Note:- Contibution for the quater is 1,119,400 for 2900 units
3. If 190 more guitars are sold then operating income will increased by 73,340
Working Notes:-
total units sold are 2900+190=3090
Sales 2,781,000
Less Variable Cost
a. Cost of goods sold 1,236,000
b. Variable selling exp 259,560
c. Variable Admn. exp. 92,700 1,588,260
------------------- --------------------
Contribution 1,192,740
Less: Fixed cost (246,400+203,000) 449,400
---------------------
Profit 743,340
Net Profit = 743,340-670,000 = 73,340
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