House of organs, inc., purchases organs from a well-known

House of Organs, Inc., purchases organs from a well-known manufacturer and sells them at the

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retail level.  The organs sell, on the average, for $2,500 each.  The average cost of an organ

 

from the manufacturer is $1,500.

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$2,500

$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

0.04

$100

 

 

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

$40

 

 

 

Insurance

   

$700

per month

       

 

                         

 

During November, the company sold and delivered 60 organs.

 

60

 

 

                         

 

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 margin format with costs organized by

 

     behavior.  Show costs and revenues on both a total and a per unit basis down through CM.

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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