Question

Marwick’s Pianos, Inc., purchases pianos from a large manufacturer and sells them at the retail level. The pianos cost, on the average, $1,485 each from the manufacturer. Marwick’s Pianos, Inc., sells the pianos to its customers at an average price of $2,600 each. The selling and administrative costs that the company incurs in a typical month are presented below:

Costs Cost Formula
Selling:
Advertising $947 per month
Sales salaries and commissions $4,804 per month, plus 5% of sales
Delivery of pianos to customers $60 per piano sold
Utilities $652 per month
Depreciation of sales facilities $4,943 per month
Administrative:
Executive salaries $13,525 per month
Insurance $681 per month
Clerical $2,459 per month, plus $40 per piano sold
Depreciation of office equipment $945 per month
During August, Marwick’s Pianos, Inc., sold and delivered 62 pianos.
Required:
1. Prepare an income statement for Marwick’s Pianos, Inc., for August. Use the traditional format, with costs organized by function.
2. Prepare an income statement for Marwick’s Pianos, Inc., for August, this time using the contribution format, with costs organized by behavior. Show costs and revenues on both a total and a per unit basis down through contribution margin.

Answer 1

Part 1

Marwick’s Pianos, Inc.

Traditional income statement for for August

Sales ($2,600 x 62 pianos) $161,200

Less Cost of Goods Sold

Cost of Goods Sold ($1,485 x 62 pianos) ($92,070)

Gross Profit $69,130

Less Expenses :

Selling and Distribution

Advertising $947

Sales salaries and commissions : Variable $8,060

Sales salaries and commissions : Fixed $4,804

Delivery : Variable $3,720

Utilities $652

Administrative Expenses

Executive salaries $13,525

Insurance $681

Clerical : Variable $2,480

Clerical : Fixed $2,459

Depreciation of office equipment $945 ($38,273)

Net Income $30,857

Part 2

Marwick’s Pianos, Inc.

Traditional income statement for for August

Total Unit

Sales ($2,600 x 62 pianos) $161,200 $2,600

Less Variable Costs :

Cost of Goods Sold ($1,485 x 62 pianos) ($92,070) ($1,485)

Sales salaries and commissions : Variable ($8,060) ($130)

Delivery : Variable ($3,720) ($60)

Clerical : Variable ($2,480) ($40)

Contribution $54,870 $885

Less Fixed Expenses

Advertising ($947)

Sales salaries and commissions : Fixed ($4,804)

Utilities ($652)

Executive salaries ($13,525)

Insurance ($681)

Clerical : Fixed ($2,459)

Depreciation of office equipment ($945)

Net Income $30,857

Step-by-step explanation:

Traditional Costing Income Statement calculates Gross Profit (Sales - Cost of Sales) whilst Contribution Costing Income Statement calculates Contribution (Sales - Variable Costs).

All Fixed Costs are treated as expenses in Contribution Costing Income Statement whilst only operating expenses are treated as expenses in Traditional Costing Income Statement.