Marwick\'s Pianos, Inc., purchases pianos from a large manufacturer for an avera

Question

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: Cost Formula Costs Selling: Advertising Sales salaries and commissions Delivery of pianos to customers Utilities Depreciation of sales facilities $700 per month $950 per month, plus 8% of sales $30 per piano sold $350 per month $800 per month Administrative: Executive salaries Insurance Clerical Depreciation of office equipment $2,500 per month $400 per month $1,000 per month, plus $20 per piano sold $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

Explanation / Answer

1) Calculation of sales Sale = selling price per unit * no of unit sold = 3125 *40per unit = $125000 Cost of goods sold cost of goods sold= selling price * no of unit sold =2450*40 per unit = 98000 Calculation of Gross Margin Gross Margin = Sale-cost of goods sold = 125000-98000 =27000 sales salaries & commisssion = $950+(8*125000) = $950+10000 = 10950. Delivery of piano = selling cost per pianos * no of unit sold = $30*40 = $1200 calculation of selling expenses selling expenses= acvertising +sales salaries& comm+delivery of pianos+utilities+depreciation of sales facilities) = ($700+10950+1200+350+800) = $ 14000 Calculation of administration exp clerical = cost of clerical per month+(no of units sold*cost of oer piano sold) = 1000+(40*20) = $1800 Administration expenses administration exp= (executive salary +insurance+clerical +depreciation of office equipment+total administration fixed exp) = ( 2500+400+1800+300) = 5000 calculation of selling and administration expenses here the selling exp is $140000 & administration exp is $5000 total selling & administration exp = ( selling exp +administration exp) = 14000+5000 = 19000 Calcultation of net income = gross margin -selling & administrative exp = $27000-19000 =$ 8000 Income Statement Particulars Amount Amount Sales (1) 125000 cost of goods sold (2) 98000 Gross margin (3)= (1)-(2) 27000 Selling expenses (4) 14000 Administration expenses (5) 5000 19000 net income 8000 2) contribution income statement Sale = selling price per unit * no of unit sold =3125*40 per unit = $125000 Calculation of Cost of goods sold cost of goods sold = selling price*no of unit sold = 2450*40p.u = 98000 Sales salaries & commission = 8/125000 = 10000 per unit sales commission = sales salaries & commission/no of unit sold = 10000/40 = $250 Delivery of piano = selling cost per pianos * no of unit sold = 30*40 =1200 calculation of Clerical clerical = cost of clerical per month+(no of units sold*cost of oer piano sold) = 40*20 =800 Particulars Amount per unit Sales (1) 125000 3125 Variable expenses Cost of goods sold(2) 98000 2450 sales commission (3) 10000 250 delivery of piano (4) 1200 30 Clerical (5) 800 20 total variable expenses(6) 110000 2750 Contribution margin (7)=(1)-(6) 15000 375 Fixed Expense advertising 700 sales commission 950 utilities 350 depreciation of sales facilities 800 executive salaries 2500 insurance 400 Clerical 1000 deprecition office equipment 300 Total fixed expenses(8) 7000 Net income ( 7)-(8) 8000

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