PROBLEM 2-14 Contribution Format versus Traditional Income Statement [Lo5]
House of Organs, Inc., purchases organs from a well-known manufacturer and sells them at the
retail level. The organs sell, on the average, for $2,500 each. The average cost of an organ from the
manufacturer is $1,500. The costs that the company incurs in a typical month are presented below:
Costs Cost Formula
Selling:
Advertising………………….. $95opermonth
Delivery of organs . . . . . . . . . . . . . . . $60 per organ sold
Sales salaries and commissions . . . . . . $4,800 per month, plus 4% of sales
Utilities…………………….. $65opermonth
Depreciation of sales facilities . . . . . . . . $5,000 per month
Administrative:
Executive salaries . . . . . . . . . . . . . . . $13,500 per month
Depreciation of office equipment . . . . . . $900 per month
Clerical. . . . . . . . . . . . . . . . . . . . . . . . . . $2,500 per month, plus $40 per organ sold
lnsurance…………………… $7oopermonth
During November, the company sold and delivered 60 organs.
Required:
1. Prepare a traditional income statement for November.
2. Prepare a contribution format income statement for November. 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?
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