Question

Problem 1-21 Traditional and Contribution Format Income Statements [LO1-6] Marwick's Pianos, Inc., purchases pianos from a large manufacturer for an average cost of $2,450 per unit and then sells them to retail customers for an average price of $3,125 each. The company's selling and administrative costs for a typical month are presented below: Cost Formula Costs Selling: Advertising Sales salaries and commissions Delivery of pianos to customers Utilities Depreciation of sales facilities Administrative: Executive salaries Insurance Clerical Depreciation of office equipment $700 per month $950 per month, plus 8% of sales $30 per piano sold $350 per month $800 per month $2,500 per month $400 per month $1,000 per month, plus $20 per piano sold $300 per month During August, Marwick's Pianos, Inc., sold and delivered 40 pianos. Required: 1. Prepare a traditional format income statement for August. 2. Prepare a contribution format income statement for August. Show costs and revenues on both a total and a per unit basis down through contribution margin.

Answer 1

1. Marwick's Pianos Inc Traditional Income Statement For the Month of August

Sales (40×$3,125)		$125,000
Cost of Goods Sold (40×$2,450)		$98,000
Gross Margin		$27,000
Selling & Administrative Expenses;
Selling Expenses;
Advertising	$700
Sales Salaries & Commission (950+8%×$125,000)	$10,950
Delivery of Pianos (40×$30)	$1,200
Utilities	$350
Depreciation of Sales Facilities	$800
Total Selling Expenses	$14,000
Administrative Expenses;
Executive Salaries	$2,500
Insurance	$400
Clerical ($1,000+40×$20)	$1,800
Depreciation of Office Equipment	$300
Total Administrative Expenses	$5,000
Total Selling and Administrative Expenses		$19,000
Net Operating Income		$8,000

2. Marwick's Pianos Inc Contribution Format Income Statement For the Month of August   

	Total	Per Piano
Sales	$125,000	3,125
Variable Expenses;
Sales Salaries and Commission	$10,000	250
Delivery of Pianos (40×$30)	$1,200	30
Clerical (40×$20)	$800	20
Cost of Goods Sold	$98,000	$2,450
Total Variable Expenses	$110,000	2,750
Contribution Margin	$15,000	375
Fixed Expense;
Advertising	$700
Sales Salaries & Commission	$950
Utilities	$350
Depreciation of Office Equipment	$300
Depreciation of Sales Facilities	$800
Executive Salaries	$2,500
Insurance	$400
Clerical	$1,000
Total Fixed Expense	$7,000
Net Operating Income	$8,000