Functional and Contribution Margin Income Statements
Response to the following problem:
Bassically Jammin', Inc. (BJI) is a retail outlet for customized bass guitars. The average cost of a bass guitar to the company is $1,000. BJI includes a markup of 50% of cost in the sales price. In 2009, BJI sold 380 bass guitars and finished the year with the same amount of inventory it had at the beginning of the year. Additional operating costs for the year were as follows:
Selling expenses:
Advertising (fixed) $ 700 per month
Commissions (mixed) 3,000 per month plus 2% of sales
Depreciation (fixed) 400 per month
Utilities (fixed) 125 per month
Freight on delivery (variable) 20 per bass guitar
Administrative expenses:
Salaries (fixed) $4,200 per month
Depreciation (fixed) 330 per month
Utilities(fixed) 200 per month
Clerical(variable) 12 per sale
Required:
1. Prepare a traditional income statement using the functional approach.
2. Prepare an income statement using the contribution margin format.
3. Interpretive Question: Which statement is more useful for decision making? Why?