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
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 . . . . . . . . . . . . . . . . . . . . . . . $950 per month
Delivery of organs . . . . . . . . . . . . . . . $60 per organ sold
Sales salaries and commissions . . . . . . $4,800 per month, plus 4% of sales
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . $650 per month
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
Insurance . . . . . . . . . . . . . . . . . . . . . . . . $700 per month
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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