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Situation 1

Honest Charlenes Auto Dealer purchases used cars at auto auctions and sells them retail. The autos, on average, sell for approximately $20,000 each and cost Charlene $13,500. The costs that the company incurs in a typical month are listed below:

Costs Cost Formula

Selling:

Advertising $3,900 per month

Preparation of Autos for Delivery $ 900 per auto sold

Sales salaries & commissions $4,100 per month, plus 7% of sales

Utilities (same every month) $5,200 per month

Depreciation on sales facility $4,500 per month

Administrative:

Executive salaries $12,800 per month

Depreciation on office equipment $2,200 per month

Clerical staff salaries $3,600 per month

Insurance $1,900 per month

During April, Honest Charlenes sold 75 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 contribution format income statement, why might it be misleading to show the fixed costs on a per unit basis?

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