Contribution Format versus Traditional Income Statement.
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……………………… | $950 permonth |
Delivery of organs……………… | $60 per organ sold |
Sales salaries and commissions… | $4,800 per month, plus 4%of sa les |
Utilities………………………… | $650 per month |
Depreciation of sales facilities…… | $5,000 per month |
Administrative: | |
Executive salaries……………… | $13,500 per month |
Depreciation of office equipment… | $900 per month |
Clerical………………………… | $2,500 per month, plus $40 per organ sold |
Insurance……………………… | $700 per month |
During November, the company sold and delivered 60 organs.
Required:
I. 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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