Question:
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. House of Organs, Inc., has always kept careful records of its costs. The costs that the company incurs in a typical month are presented below in the form of a spreadsheet:
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 an income statement for November using 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?