Sally's Gift Baskets sells gift baskets, on average, for $125; each gift basket costs, on average, $60. Debby pays salaries each month of $1, 300 and her store rent is $1,000 per month. She also pays sales commissions of 5% of the sales price. In May, 140 gift baskets were sold.

a. Prepare a traditional income statement for the month of May.

b. Prepare a contribution margin income statement for the month of May.

a. Traditional Income Statement

Sales ($125 x 140) $17,500

Cost of Sales ($60 x 140) ($8,400)

Gross Profit $9,100

Salaries ($1,300)

Rent ($1,000)

Sales Commission ($17,500 x 5%) ($875)

Net income $5,925

b. Contribution Margin Income Statement

Sales ($125 x 140) $17,500

Less: variable Costs

Cost of Sales ($60 x 140) ($8,400)

Sales Commission ($17,500 x 5%) ($875)

Contribution Margin $8,225

Less: Fixed Costs

Salaries ($1,300)

Rent ($1,000)

Net income $5,925

Explanation:

a.

Traditional Income statement calculates the gross profit after deducting the cost of goods sold from the revenue. After that it deduct all the operating expenses to calculate the Net Income.

b.

Contribution margin income statement consider all the variable expenses as cost of product cost and calculates the contribution margin, after that the fixed costs are deducted calculate the net income.