House of Organs, Inc., purchases organs from a well-known manufacturer and sells them at the retail level. The organs sell, on the average, for $2,500 each. The average cost of an organ from the manufacturer is $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:
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Costs
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Cost Formula
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Selling:
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Advertising
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$950 per month
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Delivery of Organs
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$60 per organ sold
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Sales Salaries and Commissions
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$4,800 per month, plus 4% of sales
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Utilities
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$650 per month
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Depreciation of Sales Facilities
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$5,000 per month
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Administrative:
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Executive Salaries
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$13,500 per month
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Depreciation of Office Equipment
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$900 per month
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Clerical
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$2,500 per month, plus $40 per organ sold
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Insurance
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$700 per month
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During November, the company sold and delivered 60 organs.
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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?