PROBLEM 2–19 Contribution Format versus Traditional Income Statement [LO 2–6]

Marwick’s Pianos, Inc., purchases pianos from a large manufacturer and sells them at the retail level. The pianos
cost, on the average, $2,450 each from the manufacturer. Marwick’s Pianos, Inc., sells the pianos to its customers
at an average price of $3,125 each. The selling and administrative costs that the company incurs in a typical
month are presented below:

During August, Marwick’s Pianos, Inc., sold and delivered 40 pianos.

Required:
1. Prepare an income statement for Marwick’s Pianos, Inc., for August. Use the traditional format, with costs
organized by function.
Fixed Cost Income Statement

Sales $ 125,000 40 pianos x $3125 per piano

Cost of Goods Sold $ 98,000 40 pianos x $2450 per piano
Gross Margin $ 27,000

Operating Expenses

Selling Expenses

Advertising $ 700
Sales Salaries and Commissions $ 10,950 [$950 + (8% × $125,000)]
Utilities $ 350
Depreciation of Sales Facilities $ 800
Delivery of Pianos $ 1,200 40 Pianos x $30 per piano
Total Selling Expenses $ 14,000

Administrative Expenses
Executive Salaries $ 2,500
Insurance $ 400
Depreciation of Office Equipment $ 300
Clerical $ 1,800 [$1,000 + (40 pianos × $20 per piano)]
Total Administrative Expenses $ 5,000
Total Selling and Administrative Expenses $ 19,000
Net Operating Income $ 8,000

2. Redo requirement 1 above, 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.

Contributing Income Statement

Sales $ 125,000 40 pianos x $3125 per piano

Variable Expenses:
Cost of Goods Sold $ 98,000 40 pianos x $2450 per piano
Delivery of Pianos $ 1,200 40 Pianos x $30 per piano
Sales Salaries and Commissions $ 10,000 (8% × $125,000)
Clerical $ 800 $ 110,000 $1000 + (40 Pianos x $20 per piano)

Contributing Margin $ 15,000

Fixed Selling Expenses

Advertising $ 700
Utilities $ 350
Depreciation of Sales Facilities $ 800
Total Selling Expenses $ 1,850

Fixed Administrative Expenses

Sales Salaries $ 950
Insurance $ 400
Clerical $ 1,000
Depreciation of Office Equipment $ 300
Executive Salaries $ 2,500
Total Administrative Expenses $ 5,150

Total Selling and Administrative Expenses $ 7,000

Net Operating Income $ 8,000

3. Refer to the income statement you prepared in requirement 2 above. Why might it be misleading to show the
fixed costs on a per unit basis?
By showing the fixed costs on a per unit basis you can potentially give false information to potential customers.
Giving information base on a per unit can be misleading due to the way the data is calculated. Also gross sales is
also different form the fixed Income Statement making it seem that there is a larger profit margin then there
actually is. • The fixed cost shown at per unit basis can be misleading because the management may take an
assumption that the fixed cost is also varying like the variable cost. The fixed cost is however constant and
showing it on per unit basis might create confusion.