Question

Preparing an income statement and calculating unit cost for a merchandising company

Dillon Young owns Dillon’s Pets, a small retail shop selling pet supplies. On December 31, 2018, the accounting records for Dillon’s Pets showed the following:

Merchandise Inventory on December 31, 2018 $ 10,500

Merchandise Inventory on January 1, 2018 16,000

Net Sales Revenue 56,000

Utilities Expense for the shop 3,200

Rent for the shop 4,100

Sales Commissions 2,750

Purchases of Merchandise Inventory 25,000

Requirements

1. Prepare an income statement for Dillon’s Pets for the year ended December 31, 2018.

2. Dillon’s Pets sold 5,550 units. Determine the unit cost of the merchandise sold, rounded to the nearest cent.

Short answer

The net operating income is$15,450 and the unit cost is $5.50 per unit.

Step-by-step solution

Step-by-Step SolutionStep 1: Preparation of Income Statement

Dillon’s Pet
Income Statement
Year Ended December 31, 2018
	Amount ($)	Amount ($)
Revenues:
Net Sales Revenue		$56,000
Cost of goods sold:
Beginning Merchandise Inventory	$16,000
Purchase of Merchandise	$25,000
Cost of goods available for sale	$41,000
Ending merchandise inventory	-$10,500
Cost of goods sold		$30,500
Gross Profit		$25,500
Selling and administrative Expenses:
Utilities Expense	$3,200
Rent Expense	$4,100
Sales Commission Expense	$2,750
Total selling and administrative expenses		$10,050
Operating Income		$15,450

Computation of unit cost

$$\begin{gathered} \mathbf{Unit}\mathbf{}\mathbf{Cost}\mathbf{=}\frac{\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}}{\mathrm{Total}\mathrm{Units}\mathrm{Sold}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\$30,500}{4,550} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{5}\mathbf{.}\mathbf{50} \end{gathered}$$