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APPLICATION PROBLEMS Problem 1- Contribution Format versus Traditional Income Statement (25 points) House of Organs Inc., purchases organs from a well-known manufacturer and sells them at the retail level. The organs sell, on the average, for $2,500 each. The average cost of an organ from the manufacturer is $1,500. The costs that the company incurs in a typical month are presented below: Costs Cost Formula Selling Advertising Delivery of orga n. Sales salaries and commission tilites.. Depreciation of sales facilities S950 per month $60 per organ solod $4,800 per month, plus 4% of sales $650 per month $5,000 per month Administrative: S13,500 per month Clerical$2,500 per month, plus $40 per organ sold Insurance... S700 per month During November, the company sold and delivered 60 organs. Required: 1. Prepare a traditional income statement for November. 2. Prepare a contribution format income statement for November. 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?
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1. The traditional income statement for the month of November is as follows: Particulars Amount S2,500 60 S1,50,000 S90,000 $60,000 2 Selling price per unit 3 No. of units sold 4 Sales 5 Less: Cost of goods sold 6 Gross Profit 7 Less: Operating Expenses 8 Selling Expenses 9 Advertising 10 Delivery of organs 11 Sales salaries and commissions 12 Utilities 13 Depreciation of sales facilities 14 Administrative Expenses 15 Executie Salaries 16 Depreciation of office equipment 17 Clerical 18 Insurance 19 Total operating expenses 20 Net Profit S950 S3,600 S10,800 S650 $5,000 S13,500 S900 $4,900 S700 S41,000 S19,000The formulas are shown below Particulars Amount 2500 60 2 Selling price per unit 3 No. of units sold 4 Sales 5 Less: Cost of goods sold 1-1500B3 6 Gross Profit 7 Less: Operating Expenses 8 Selling Expenses: 9 Advertising 10 Delivery of organs 11 Sales salaries and commissions 1-4800+B4*4% 12 Utilities 13 Depreciation of sales facilities 5000 14 Administrative Expenses: 15 Executie Salaries 16 Depreciation of office equipment 900 17 Clerical 18 Insurance 19 Total operating expenses B2 B3 -B4-B5 950 -60 B3 650 13500 2500+40ВЗ 700 =SUM1(B9:B18) 20 Net Profit B6-B192. The contribution format income statement for the month of November is as follows: Particulars Cost per unit Total Amount S2,500 60 2500S1,50,000 2 Selling price 3 No. of units sold 4 Sales 5 Less: Variable Expenses 6 Cost of purchasing organs 7 Delivery of organs 8 Variable Sales salaries and commissions 9 Variable clerical costs 10 Contribution Margin 11 Less: Fixed Expenses 12 Advertising 13 Fixed sales salaries and commissions 14 Utilities 15 Depreciaiton of sales facilities 16 Executive Salaries 17 Depreciation of office equipment 18 Fixed clerical costs 19 Insurance 20 Net Income 2500 $1,500 S60 $100 S40 S800 S90,000 $3,600 6,000 S2,400 $48,000 S16 S80 $11 S83 S225 S15 S42 S12 S317 950 4800 650 5000 13500 900 2500 700 S19,000The formulas are shown below: Particulars Cost per unit Total Amount 2500 60 2 Selling price 3 No. of units sold 4 Sales 5 Less: Variable Expenses 6 Cost of purchasing organs 7 Delivery of organs 8 Variable Sales salaries and commissions-G4*4% 9 Variable clerical costs 10 Contribution Margin 11 Less: Fixed Expenses 12 Advertising 13 Fixed sales salaries and commissions 4800 H3 14 Utilities 15 Depreciaiton of sales facilities 16 Executive Salaries 17 Depreciation of office equipment 18 Fixed clerical costs 19 Insurance 20 Net Income 2500 -G2 G 1500 H2 H3 -G6 H3 -G7 H3 =H4*4% -G9 H 60 40 -G4-SUMG6:G9) H4-SUM(H6:H9) 950 4800 650 5000 13500 900 2500 700 950/H3 -650/H3 -5000/H3 -13500/H3 900/H3 2500/H3 700/H3 -G10-SUM(G12:G19) H10-SUM(H12:H19)3. The depiction of fixed costs on a per unit basis might be misleading because fixed costs are not affected by the volume of sales or production. These costs remain same throughout all the capacity levels. Showing fixed costs on a per unit basis might make an impression of lesser costs when the volume of sales is high and vice-versa

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