Situation 1

Honest Andreas 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 Andreas 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?