# Tutorial

Topics: Costs, Variable cost, Fixed cost Pages: 14 (2886 words) Published: March 10, 2013
1-14BContribution Format versus Traditional Income Statement (LO5) CHECK FIGURE
(2) Net operating income: \$65,674

House of Pianos, Inc., purchases pianos from a well-known manufacturer and sells them at the retail level. The pianos sell, on the average, for \$3,300 each. The average cost of an piano from the manufacturer is \$1,492. The costs that the company incurs in a typical month are presented below:

|Costs |Cost Formula | |Selling: | | | Advertising ......................................... |\$955 per month | | Delivery of pianos ............................... |\$61 per piano sold | | Sales salaries and commissions............. |\$4,823 per month, plus 4% of sales | | Utilities ............................................... |\$633 per month | | Depreciation of sales facilities .............. |\$4,944 per month | |Administrative: | | | Executive salaries ................................ |\$13,490 per month | | Depreciation of office equipment .......... |\$943 per month | | Clerical ............................................... |\$2,499 per month, plus \$37 per piano sold | | Insurance ........................................... |\$719 per month |

During November, the company sold and delivered 60 pianos.

Required:
1.Prepare a traditional income statement for September.
2.Prepare a contribution format income statement for September. 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?

PROBLEM 1-15BIdentifying Cost Behavior Patterns (LO3)

In Problem 1-15A in the text are a number of graphs displaying cost behavior patterns that might be found in a company’s cost structure. The vertical axis on each graph represents total cost, and the horizontal axis represents level of activity (volume).

Required:
1.For each of the following situations, identify the graph from Problem 1-15A in the text that illustrates the cost behavior pattern involved. Any graph may be used more than once. a.City water bill, which is computed as follows:

|First 200,000 gallons or less |\$300 |flat fee | |Next 15,000 gallons |\$0.004 |per gallon used | |Next 15,000 gallons |\$0.008 |per gallon used | |Next 15,000 gallons |\$0.012 |per gallon used | |Etc. |Etc. | |

b.Use of a machine under a lease, where a minimum charge of \$2,500 is paid for up to 100 hours of machine time. After 100 hours of machine time, an additional charge of \$4 per hour is paid up to a maximum charge of \$4,000 per period. c.Cost of raw materials used.

d.Rent on a factory building donated by the city, where the agreement calls for a...