Question

Problem 1-21 (Algo) Traditional and Contribution Format Income Statements [LO1-6]

Marwick’s Pianos, Inc., purchases pianos from a large manufacturer for an average cost of $1,509 per unit and then sells them to retail customers for an average price of $2,600 each. The company’s selling and administrative costs for a typical month are presented below:

Costs	Cost Formula
Selling:
Advertising	$	946 per month
Sales salaries and commissions	$	4,788 per month, plus 4% of sales
Delivery of pianos to customers	$	57 per piano sold
Utilities	$	662 per month
Depreciation of sales facilities	$	5,076 per month
Administrative:
Executive salaries	$	13,403 per month
Insurance	$	716 per month
Clerical	$	2,515 per month, plus $38 per piano sold
Depreciation of office equipment	$	863 per month

During August, Marwick’s Pianos, Inc., sold and delivered 61 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

Traditional Income Statement
Sales					$ 158,600.00	(61 x $ 2600)
Cost of goods sold					$    92,049.00	(61 x $ 1509)
Gross margin					$    66,551.00
Selling and administrative expenses
Selling expenses
Advertising				$      946.00
Sales salaries and commissions				$ 11,132.00		[$ 4788 + ($ 158600 x 4%)]
Delivery of pianos				$   3,477.00		(61 x $ 57)
Utilities				$      662.00
Depreciation of sales facilities				$   5,076.00
Total selling expenses				$ 21,293.00
Administrative expenses
Executive salaries				$ 13,403.00
Insurance				$      716.00
Clerical				$   4,833.00		[$ 2515 + ($ 38 x 61)]
Depreciation of office equipment				$      863.00
Total administrative expenses				$ 19,815.00
Total selling and administrative expenses					$    41,108.00
Net Operating income					$    25,443.00

Contribution Formal Income Statement
Particulars						Total	Per Unit
Sales			(61 x $ 2600)			$ 158,600.00	$ 2,600.00
Variable Expenses:
Cost of goods sold			(61 x $ 1509)			$    92,049.00	$ 1,509.00
Sales salaries and commissions			($ 158600 x 4%)			$      6,344.00	$     104.00
Delivery of pianos			(61 x $ 57)			$      3,477.00	$       57.00
Clerical			($ 38 x 61)			$      2,318.00	$       38.00
Total Variable Expenses						$ 104,188.00	$ 1,708.00
Contribution Margin						$    54,412.00	$     892.00
Fixed Costs:
Advertising						$         946.00
Sales salaries and commissions						$      4,788.00
Utilities						$         662.00
Depreciation of sales facilities						$      5,076.00
Executive salaries						$    13,403.00
Insurance						$         716.00
Clerical						$      2,515.00
Depreciation of office equipment						$         863.00
Total Fixed Expenses						$    28,969.00
Net Operating income						$    25,443.00