Question

Situation 1

Honest Andrea’s Auto Dealer purchases used cars at auto auctions and sells them retail. The autos, on average, sell for approximately $20,000 each and cost Andrea $13,000. The costs that the company incurs in a typical month are listed below:

Costs                                                                                 Cost Formula

Selling:

      Advertising                                                                 $3,800 per month

      Preparation of Autos for Delivery                              $    750 per auto sold

      Sales salaries & commissions                                      $4,500 per month, plus 7% of sales

      Utilities                                                                       $5,200 per month

      Depreciation on sales facility                                      $4,500 per month

Administrative:

      Executive salaries                                                        $14,000 per month

      Depreciation on office equipment                              $2,200 per month

      Clerical staff salaries                                                   $3,500 per month

      Insurance                                                                     $1,800 per month

During April, Honest Andrea’s sold 65 autos.

Required

Prepare a traditional income statement as of April 30. All numbers should be rounded to the nearest dollar.

Prepare a contribution format income statement as of April 30. All numbers should be rounded to the nearest dollar. Show costs and revenues on both a total and per unit basis down through the contribution margin.

What costs does the Contribution Margin Income Statement format isolate (make apparent) that the Traditional Income Statement format does not?

For the statement you prepared for Part 2, why might it be misleading to show the fixed costs on a per unit basis?

Answer 1

1	Prepare a traditional income statement as of April 30
				In $
	Sales (65*20000)			1300000
	Less : Cost of Goods sold (65*13000)			845000
	Gross Margin			455000
	Selling and Administrative Expenses
	Advertising			3800
	Preparation of Autos for delivery		(750*65)	48750
	Sales salaries			4500
	Sales commissions		(1300000*7%)	91000
	Utilities			5200
	Depreciation on Sales facility			4500
	Total Selling Expense			157750
	Administrative Expenses
	Executive Salaries			14000
	Depreciation on office equipment			2200
	Clerical staff salaries			3500
	Insurance			1800
	Total Administrative Expenses			21500
	Total Selling and administrative expenses			179250
	Net Operating Income			275750
2	Prepare a contribution format income statement as of April 30
				Per unit	Total
	Sales			20000	1300000
	Variable Expenses
	Cost of Goods Sold			13000	845000
	Preparation of Autos for delivery			750	48750
	Sales commissions			1400	91000
	Total Variable Expenses			15150	984750
	Contribution Margin			4850	315250
	Fixed Expenses
	Advertising			58.46154	3800
	Sales Salaries			69.23077	4500
	Utilities			80	5200
	Depreciation on sales facility			69.23077	4500
	Executive Salaries			215.3846	14000
	Depreciation on Office Equipment			33.84615	2200
	Clerical staff salaries			53.84615	3500
	Insurance			27.69231	1800
	Total Fixed Costs			607.6923	39500
	Net Operating Income			4242.308	275750
3	What costs does the Contribution Margin Income Statement format isolate (make apparent) that the Traditional Income Statement format does not?
	Contribution Margin Income statement format makes apparent the variable and fixed costs of producing and selling the goods which traditional income statement does not distinguish
4	For the statement you prepared for Part 2, why might it be misleading to show the fixed costs on a per unit basis?
	Showing Fixed costs on a per unit basis may seem like variable costs which may be misleading, also fixed costs at a particular activity level remains the same