Contribution margin income statement (Learning Objective 6)

Rachel’s Rock Shop is a full-service music store. Rachel rents and sells instruments, sells sheet music, and hires musicians on an “as-needed” hourly basis to give student lessons. She also has one full-time employee who helps her run the shop. Her general ledger accounts indicate the following for the year:

Based on this information, prepare Rachel’s income statement using two formats: traditional format and contribution margin format. When preparing the income statements, you may combine the sales revenue accounts, but show all other detail. Which income statement will be more useful to Rachel as she plans for next year? Why?

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Instrument rental revenue....... Cost of sheet music sold........... Instrument sales......... Straight-line depreciation expense on owned rental equipment. Sheet music sales..... Music lesson revenue........ Cost of instruments sold............. Store lease payments. Payments to musicians........ Full-time employee salary... $22,000 $ 2,000 $27,000 $ 4,000 $ 7,000 $40,000 $ 7,500 $12,000 $25,000 $30,000