Situation 1 Honest Andrea’s Auto Dealer purchases used cars at auto auctions and
ID: 2329197 • Letter: S
Question
Situation 1
Honest Andrea’s Auto Dealer purchases used cars at auto auctions and sells them retail. The autos, on average, sell for approximately $20,000 each and cost Andrea $13,000. The costs that the company incurs in a typical month are listed below:
Costs Cost Formula
Selling:
Advertising $3,800 per month
Preparation of Autos for Delivery $ 750 per auto sold
Sales salaries & commissions $4,500 per month, plus 7% of sales
Utilities $5,200 per month
Depreciation on sales facility $4,500 per month
Administrative:
Executive salaries $14,000 per month
Depreciation on office equipment $2,200 per month
Clerical staff salaries $3,500 per month
Insurance $1,800 per month
During April, Honest Andrea’s sold 65 autos.
Required
Prepare a traditional income statement as of April 30. All numbers should be rounded to the nearest dollar.
Prepare a contribution format income statement as of April 30. All numbers should be rounded to the nearest dollar. Show costs and revenues on both a total and per unit basis down through the contribution margin.
What costs does the Contribution Margin Income Statement format isolate (make apparent) that the Traditional Income Statement format does not?
For the statement you prepared for Part 2, why might it be misleading to show the fixed costs on a per unit basis?
Explanation / Answer
Month - April
Number of sales = 65 auto's
Cost per auto = $13,000
Seeling price per auto = $20,000
a. Traditional Income statement as of April 30
Note 1 - Sales revenue
Number of sales = 65 auto's
Selling price per auto = $20,000
Therfore, total sales revenue = 65 auto's x $20,000 = $1,300,000
Note 2 - Cost of Goods sold
Number of sales = 65 auto's
Cost per auto = $13,000
Total cost of auto = $65 auto's x $13,000 = $845,000
Note 3 - Preparation of Autos for Delivery
Number of autos sold = 65 auto's
Preparation of Autos for Delivery = $750
total cost of Preparation of Autos for Delivery during april = 65 auto's x $750 = $48,750
Note 4 - Sales salaries & commissions
Number of auto's sold during april = 65 auto's
Selling price per auto = $20,000
Sales commission per auto = sales x 7% = $20,000 x 7% = $1,400
Total sales Commission = 65 auto's x $1,400 = $91,000
Sales salaries during april = $4,500
Total sales salaries & Commission = $91,000 + $4,500 = $95,500
b. Contribution format income statement as of April 30
3. Contribution format income statement differentiates between variable oosts and Fixed costs. This classification of total costs into variable and fixed is what isolates the Contribution Margin Income Statement from the traditional income statement format.
4. As the fixed costs do not change with respect to change in number of units, it will be misleading to show the fixed costs on a per unit basis.
Sales revenue (Note 1) $1,300,000 Less: Cost of Goods Sold (Note 2) $845,000 Gross Profit $455,000 Less: Selling and administrative expenses (Fixed and Variable) Selling expenses: Advertising $3,800 Preparation of Autos for Delivery (Note 3) $48,750 Sales salaries & commissions (Note 4) $95,500 Utilities $5,200 Depreciation on sales facility $4,500 $157,750 Administrative expenses: Executive salaries $14,000 Depreciation on office equipment $2,200 Clerical staff salaries $3,500 Insurance $1,800 $21,500 Total Selling and Administrative expenses $179,250 Net Profit $275,750