How to Prepare a Traditional Income Statement

Question 1 

The traditional income statement above shows the summary of how Marwick’s Pianos, Inc. generates its revenues and incurs costs through both non-operating and operating activities. The costs are categorized based on the activity carried out by the organization. For instance, Marwick’s Pianos, Inc. carries out two major activities, including selling operations and administrative activities. Resultantly, the costs have been categorized into selling expenses and administrative expenses. 

Question 2 

The contribution margin income statement of Marwick’s Pianos, Inc. shows its contribution margin and net income. The costs have been categorized based on their level of variability. If the costs are variable, they are classified as variable expenses. On the contrary, the costs which are not variable have been classified as fixed expenses. In this case, in calculating the contribution margin, both the variable selling expenses and variable administrative expenses have been incorporated. After the contribution margin has been computed, the fixed selling expenses and fixed administrative expenses have been taken into account in computing Marwick’s Pianos, Inc.’s net operating income. 

Question 3 

Variable costs are depicted on a per unit basis since the total variable cost is impacted by the shifts in the entity’s output. For instance, in Marwick’s Pianos, Inc.’s case, the variable cost of $110,000 will increase when more pianos are produced. The $110,000 is the total variable cost for only 40 pianos. The variable cost per unit is $2750, and when multiplied by the number of pianos produced, it yields the total variable cost. If the variable cost per unit increases, the total variable cost also increases. 

On the contrary, the fixed costs of an entity do not change when there is a shift in the production capacity. For instance, when Marwick’s Pianos, Inc. produces 50 pianos, the total fixed costs will remain $7,000. When showing the fixed cost per unit, the total fixed cost will have to be divided by the number of goods produced. In the case of Marwick’s Pianos, Inc., the total fixed cost of $7000 will have to be divided by 40 pianos to obtain the fixed cost per unit, amounting to $175. When Marwick’s Pianos, Inc. produces 50 pianos, the total fixed cost will be 50*175=$8,750. In this case, the management will be misled to think that the fixed costs are variable since they can increase with the increase in the number of pianos produced. Such an analysis is wrong since fixed costs do not change regardless of how many pianos are produced. The true impression is realized when fixed costs are recorded in total amounts rather than per unit basis.