Marwick’s Pianos, Inc., purchases pianos from a large manufacturer for an average cost of $2,450 per unit and then sells them to retail customers for an average price of $3,125 each. The company’s selling and administrative costs for a typical month are presented below:
Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost Formula
Selling:
Advertising . . . . . . . . . . . . . . . . . . . . . . . $700 per month
Sales salaries and commissions . . . . . $950 per month, plus 8% of sales
Delivery of pianos to customers . . . . . $30 per piano sold
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . $350 per month
Depreciation of sales facilities . . . . . . . $800 per month
Administrative:
Executive salaries . . . . . . . . . . . . . . . . . $2,500 per month
Insurance . . . . . . . . . . . . . . . . . . . . . . . . $400 per month
Clerical . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000 per month, plus $20 per piano sold
Depreciation of office equipment . . . . $300 per month
During August, Marwick’s Pianos, Inc., sold and delivered 40 pianos.
Required:
1. Prepare a traditional format income statement for August.
2. Prepare a contribution format income statement for August. 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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