Question

House of Pianos, Inc., purchases pianos from a well-known manufacturer and sells them at the retail level. The pianos sell, on the average, for $3,300 each. The average cost of an piano from the manufacturer is $1,492. The costs that the company incurs in a typical month are presented below: Costs Cost Formula Selling: Advertising ......................................... $955 per month Delivery of pianos ............................... $61 per piano sold Sales salaries and commissions............. $4,823 per month, plus 4% of sales Utilities ............................................... $633 per month Depreciation of sales facilities .............. $4,944 per month Administrative: Executive salaries ................................ $13,490 per month Depreciation of office equipment .......... $943 per month Clerical ............................................... $2,499 per month, plus $37 per piano sold Insurance ........................................... $719 per month During November, the company sold and delivered 60 pianos. Required: 1. Prepare a traditional income statement for September. 2. Prepare a contribution format income statement for September. Show costs and revenues on both a total and a per unit basis down through contribution margin. 3. Refer to the income statement you prepared in (2) above. Why might it be misleading to show the fixed costs on a per unit basis?

Answer 1

Sales = Units of pianos sold × Price of each piano

= 60 × $3,300

= $198,000

Cost of Goods Sold = Average cost of each piano × Units of pianos sold

= $1,492 × 60

= $89,520

Gross profit on sales = Sales - Cost of Goods Sold

= $198,000 - $89,520

= $108,480

Total selling expenses:

= Advertising + Delivery + Sales salaries + Commissions + Utilities + Depreciation

= $955 + ($61 × 60) + $4,823 + (198,000 x 4%) + $633 + $4,944

= $955 + 3,660 + $4,823 + $7,920 + $633 + $4,944

= $22,935

Total Admin Expenses:

= Executive salaries + Depreciation + Clerical + Additional clerical expense + Insurance

= $13,490 + $943 + $2,499 + (37 × 60) + $719

= $19,871

Operating Income:

= Gross profit on sales - Total selling expenses - Total Admin Expenses

= $108,480 - $22,935 - $19,871

= $65,674