Assignment 1
1. Contribution Format versus Traditional Income Statement
Marwick’s Pianos, Inc., purchases pianos from a large manufacturer and sells them at the retail level. The pianos cost, on the average, $125 each from the manufacturer. Marwick’s Pianos, Inc., sells the pianos to its customers at an average price of $250 each. The selling and administrative costs that the company incurs in a typical month are presented below:

Costs | Cost Formula | | Selling: | | | Advertising | $800 | per month | Sales salaries and commissions | $1,200 | per month, plus 10% of sales | Delivery of pianos to customers | $15 | per piano sold | Utilities | $500 | per month | Depreciation of sales facilities | $750 | per month | Administrative: | | | Executive salaries | $2,000 | per month | Insurance | $250 | per month | Clerical | $700 | per month, plus $5 per piano sold | Depreciation of office equipment | $400 | per month |

During June, Marwick’s Pianos, Inc., sold and delivered 100 pianos.

Required:

1. Prepare an income statement for Marwick’s Pianos, Inc., for June. 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. 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?

2. Sales Mix; Break-Even Analysis; Margin of Safety

Island Novelties, Inc., of Palau makes two products, Hawaiian Fantasy and Tahitian Joy. Present revenue, cost, and sales data for the two products follow: | | Hawaiian Fantasy | Tahitian Joy | | Selling price per unit | $20.00 | $25.00 | | Variable expenses per unit | $14.00 | $10.00 | |