Data P2 Part II-2: Marwick\'s Pianos, Inc. purchases pianos from a large manufac
ID: 2422685 • Letter: D
Question
Data P2 Part II-2: 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: MARWICK'S PIANOS, INC. 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 Average sales price of piano $3,125 Average cost of piano $2,450 Organs sold & delivered in August 40 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 margin format, with costs organized by behavior. 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? Data P2 Part II-2: 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: MARWICK'S PIANOS, INC. 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 Average sales price of piano $3,125 Average cost of piano $2,450 Organs sold & delivered in August 40 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 margin format, with costs organized by behavior. 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?Explanation / Answer
1.
Marwick’s Pianos, Inc.
Income Statement
For the Month of August
Sales (40 pianos × $3,125 per piano)
$125,000
Cost of goods sold
(40 pianos × $2,450 per piano)
98,000
Gross margin
27,000
Selling and administrative expenses:
Selling expenses:
Advertising
$ 700
Sales salaries and commissions
[$950 + (8% × $125,000)]
10,950
Delivery of pianos
(40 pianos × $30 per piano)
1,200
Utilities
350
Depreciation of sales facilities
800
Total selling expense
14,000
Administrative expenses
Executive salaries
2,500
Insurance
400
Clerical
[$1,000 + (40 pianos × $20 per piano)]..
1,800
Depreciation of office equipment
300
Total administrative expenses
5,000
Total selling and administrative expenses
19,000
Net operating income
$8,000
.
Marwick’s Pianos, Inc.
Income Statement
For the Month of August
Total
Per
Piano
Sales (40 pianos × $3,125 per piano)
$125,000
$3,125
Variable expenses:
Cost of goods sold
(40 pianos × $2,450 per piano)
98,000
2,450
Sales commissions (8% × $125,000)
10,000
250
Delivery of pianos (40 pianos × $30 per piano)
1,200
30
Clerical (40 pianos × $20 per piano)
800
20
Total variable expenses
110,000
2,750
Contribution margin
15,000
$ 375
Fixed expenses
Advertising
700
Sales salaries
950
Utilities
350
Depreciation of sales facilities
800
Executive salaries
2,500
Insurance
400
Clerical
1,000
Depreciation of office equipment
300
Total fixed expenses
7,000
Net operating income
$ 8,000
3. Fixed costs remain constant in total but on a per unit basis vary inverse proportion with changes in the activity level.
As the activity level increases, the fixed costs will decrease on a per unit basis. Showing fixed costs on a per unit basis on the income statement might mislead management into thinking that the fixed costs behave in the same way as the variable costs.
This might be misled management into thinking that the per unit fixed costs would be the same regardless of how many pianos were sold during the month. For this reason, fixed costs generally are shown only in totals on a contribution format income statement.
1.
Marwick’s Pianos, Inc.
Income Statement
For the Month of August
Sales (40 pianos × $3,125 per piano)
$125,000
Cost of goods sold
(40 pianos × $2,450 per piano)
98,000
Gross margin
27,000
Selling and administrative expenses:
Selling expenses:
Advertising
$ 700
Sales salaries and commissions
[$950 + (8% × $125,000)]
10,950
Delivery of pianos
(40 pianos × $30 per piano)
1,200
Utilities
350
Depreciation of sales facilities
800
Total selling expense
14,000
Administrative expenses
Executive salaries
2,500
Insurance
400
Clerical
[$1,000 + (40 pianos × $20 per piano)]..
1,800
Depreciation of office equipment
300
Total administrative expenses
5,000
Total selling and administrative expenses
19,000
Net operating income
$8,000
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