Situation 1 Honest Andrea’s Auto Dealer purchases used cars at auto auctions and
ID: 2331071 • 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
1 Prepare a traditional income statement as of April 30 In $ Sales (65*20000) 1300000 Less : Cost of Goods sold (65*13000) 845000 Gross Margin 455000 Selling and Administrative Expenses Advertising 3800 Preparation of Autos for delivery (750*65) 48750 Sales salaries 4500 Sales commissions (1300000*7%) 91000 Utilities 5200 Depreciation on Sales facility 4500 Total Selling Expense 157750 Administrative Expenses Executive Salaries 14000 Depreciation on office equipment 2200 Clerical staff salaries 3500 Insurance 1800 Total Administrative Expenses 21500 Total Selling and administrative expenses 179250 Net Operating Income 275750 2 Prepare a contribution format income statement as of April 30 Per unit Total Sales 20000 1300000 Variable Expenses Cost of Goods Sold 13000 845000 Preparation of Autos for delivery 750 48750 Sales commissions 1400 91000 Total Variable Expenses 15150 984750 Contribution Margin 4850 315250 Fixed Expenses Advertising 58.46154 3800 Sales Salaries 69.23077 4500 Utilities 80 5200 Depreciation on sales facility 69.23077 4500 Executive Salaries 215.3846 14000 Depreciation on Office Equipment 33.84615 2200 Clerical staff salaries 53.84615 3500 Insurance 27.69231 1800 Total Fixed Costs 607.6923 39500 Net Operating Income 4242.308 275750 3 What costs does the Contribution Margin Income Statement format isolate (make apparent) that the Traditional Income Statement format does not? Contribution Margin Income statement format makes apparent the variable and fixed costs of producing and selling the goods which traditional income statement does not distinguish 4 For the statement you prepared for Part 2, why might it be misleading to show the fixed costs on a per unit basis? Showing Fixed costs on a per unit basis may seem like variable costs which may be misleading, also fixed costs at a particular activity level remains the same