Question

Home Entertainment is a small, family-owned business that purchases LCD televisions from a reputable manufacturer and sells them at the retail level. The televisions sell, on average, for $2,250 each. The average cost of a television from the manufacturer is $1,340.

Home Entertainment has always kept careful accounting records, and the costs that it incurs in a typical month are as follows:

  

Costs	Cost Formula
Selling:
Advertising	$	1,135	per month
Delivery of televisions	$	45	per television sold
Sales salaries and commissions	$	3,070	per month, plus 4% of sales
Utilities	$	460	per month
Depreciation of sales facilities	$	3,660	per month
Administrative:
Executive salaries	$	9,550	per month
Depreciation of office equipment	$	520	per month
Clerical	$	1,660	per month, plus $41 per television sold
Insurance	$	480	per month

  

During April, the company sold and delivered 210 televisions.

  

Required:

1.	Prepare an income statement for April using the traditional format with costs organized by function.

      

2.	Prepare an income statement for April, this time using the contribution format with costs organized by behaviour. Show costs and revenues on both a total and a per unit basis down through contribution margin.

Answer 1

Solution:

Traditional Income Statement - Home Entertainment
Particulars	Details	Amount
Sales (210*2250)		$472,500.00
Less: Cost of Goods Sold (210*1340)		$281,400.00
Gross Profit		$191,100.00
Sellling Expenses:
Advertising	$1,135.00
Delivery of Television(210*45)	$9,450.00
Sales Salaries and Commissions (3070 + 4% of 472500)	$21,970.00
Utilities	$460.00
Depreciation of Sales Facilities	$3,660.00	$36,675.00
Administrative Expenses:
Executive Salaries	$9,550.00
Depreciation of office equipment	$520.00
Clerical (1660 + 210*41)	$10,270.00
Insurance	$480.00	$20,820.00
Net Income		$133,605.00

Contribution margin Income Statement - Home Entertainment
Particulars	Per Unit	Total
Sales	$2,250.00	$472,500.00
Variable Cost:
Purchase Cost	$1,340.00	$281,400.00
Sales Commission	$90.00	$18,900.00
Delivery of Television to customers	$45.00	$9,450.00
Clerical Expense	$41.00	$8,610.00
Contribution	$734.00	$154,140.00
Fixed Cost:
Advertising		$1,135.00
Sales Salaries		$3,070.00
Utilities		$460.00
Depreciation of Sales Facilities		$3,660.00
Executive Salaries		$9,550.00
Depreciation of office equipment		$520.00
Clerical		$1,660.00
Insurance		$480.00
Net Income		$133,605.00