Problem 119A Contribution Format versus Traditional Income S

Problem 1-19A Contribution Format versus Traditional Income Statement [LO1-6 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: Costs Selling: Cost Formula 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 an income statement for Marwick\'s Pianos, Inc., for August. Use the traditional format, with costs organized by function.

Solution

The traditional income statement and contribution income statement are two methods used to calculate the net operating income of the company. The major difference between the two methods is the contribution statement considers only the variable costs as a part of cost of goods sold as it is based on the reasoning that the company will incur the fixed costs, irrespective of the quantity sold. Whereas in case of traditional income statement both fixed and variable overheads are considered a part of the cost of goods sold.

For the Month of August

Introduction