PROBLEM 2–19 Contribution Format versus Traditional Income Statement [LO 2–6]
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 Cost Formula
Selling:
Sales salaries and □commissions …… \$950□per□month,□plus□8%□of sales
Delivery□ of pianos sold □customers ……\$30 per piano sold
Utilities. \$350 per month
Depreciation□ of sales facilities. \$800 per month
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

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.

1. Redo requirement 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.
2. Refer to the income statement you prepared in requirement 2 above. Why might it be misleading to show the fixed costs on a per unit basis?
PROBLEM 2–20
High-Low Method; Predicting Cost [LO 2–4, LO 2–5]Nova Company’s total overhead cost at various levels of activity are presented below:
April. 70,000 \$198,000
May 60,000 \$174,000
June 80,000 \$222,000
July 90,000 \$246,000
Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 60,000 machine-hour level of activity is:

Utilities□(variable) 48,000
Supervisory salaries□ (fixed). 21,000
Maintenance□(mixed) 105,000
Nova Company’s management wants to break down the maintenance cost into its variable and fixed cost elements.
Required:

1. Estimate how much of the \$246,000 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the \$246,000 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs!)
2. Using the high-low method, estimate a cost formula for maintenance.
3. Express the company’s total overhead cost in the linear equation form Y = a + bX.
4. What total overhead cost would you expect to be incurred at an activity level of 75,000 machine-hours?

PROBLEM 3–25
Changes in Fixed and Variable Expenses; Break-Even and Target Profit Analysis [LO3–4, LO3–5, LO3–6]
Neptune Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the company is anxious to produce and sell. The new toy will sell for \$3 per unit. Enough capacity exists in the company’s plant to produce 16,000 units of the toy each month. Variable expenses to manufacture and sell one unit would be \$1.25, and fixed expenses associated with the toy would total \$35,000 per month. The company’s Marketing Department predicts that demand for the new toy will exceed the 16,000 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of \$1,000 per month. Variable expenses in the rented facility would total \$1.40 per unit, due to somewhat less efficient operations than in the main plant.

1. Compute the monthly break-even point for the new toy in unit sales and in dollar sales. 2. How many units must be sold each month to make a monthly profit of \$12,000? 3. If the sales manager receives a bonus of 10 cents for each unit sold in excess of the break-even point, how many units must be sold each month to earn a return of 25% on the monthly investment in fixed expenses?

Sample Solution