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 pianos to its customer at an average price of $3,125 each. The selling and administrative costs that the company incurs in a typical month are presented below:
Costs Cost Formula
Selling:
Advertising $700 per month
Sales salaries asnd 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 an income statement for Marwick's Pianos, Inc. for August. Use the traditional format, with costs organized by function.
2. Redo (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.

The pianos cost, on the average, $2,450 each from the manufacturer. Marwick's Pianos Inc, sells pianos to its customer at an average price of $3,125 each.

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.

1) Traditional format:

Revenue= 40* 3125= 125,000

Cost of goods sold= 2450*40= 98000 (-)

Gross profit= 27,000

Selling expense:

Advertising= 700

Fixed Sales salaries and commissions= 950

Variable Sales salaries and commissions= 0.08*125000= 10,000

Delivery of pianos to customers= 30*40= 1200

Utilities= 350

Depreciation of sales facilities= 800

Total= 14,000 (-)

Administrative:

Executive salaries= 2,500

Insurance= 400

Fixed Clerical= 1,000

Variable Clerical= 20*40= 800

Depreciation of office equipment= 300

Total= 5,000 (-)

Net operating profit= 8,000

2) Contribution format:

Revenue= 125,000

Cost of goods sold= 98000 (-)

Variable Sales salaries and commissions= 10,000 (-)

Delivery of pianos to customers= 1200 (-)

Variable Clerical= 800 (-)

Contribution Margin= 15,000

Fixed costs:

Advertising= 700

Fixed Sales salaries and commissions= 950

Utilities= 350

Depreciation of sales facilities= 800

Total= 2800 (-)

Executive salaries= 2,500

Insurance= 400

Fixed Clerical= 1,000

Depreciation of office equipment= 300

Total= 4,200 (-)

Total fixed costs= 7000 (-)

Net operating profit= 8000