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Revised Inome Statement, The Contribution Margin Pproach

1091 words - 5 pages

A Revised Income Statement, The Contribution Margin Approach
ACC403-Principles of Accounting
Module 2 - CASE

1. Prepare income statements under variable (contribution margin) and traditional (absorption) costing for the year ended December 31, 2008.
The E Company Income statement for year ending December 31, 2008 Absorption / Contribution
Product Information: | | |
| | |
Units Produced | 400,000 | |
Units Sold | 345,000 | |
Selling Price per Unit | $19.00 | |
Direct Material Cost per Unit | $3.50 | |
Direct Labor Cost per Unit | $1.40 | |
Variable Selling Costs per Unit | $1.20 | |
Fixed Manufacturing Costs | $1,600,000 | |
Fixed Selling ...view middle of the document...

531578947 (53%)

Operating (net) income ratio:
Net Operating Income (NOI) is used when calculating the Operating profit ratio of a firm.
Operating Profit Margin = Net Operating Income (NOI) / Net Sales
Part 1- (contribution) 
1,650,500 / 3,484,500 = .473669106 (47%)

Part 2- (absorption)
1,870,500 / 3,484,500 = .536805854 (54%)
Operating Profit Margin ratio measures the operating efficiency of a firm indicating if the relationship of the fixed costs to the production volume. The higher the ratio, the better a company is because this indicates that the firm’s fixed costs are lower than the firms’ gross income.
3. Explain the difference and reconcile operating income for the two methods.
To recoile the operating income difference resulting from each method:
Calculate the change between beginning and ending inventory, and multiply this change by the budgeted fixed overhead rate.
85,000 – 55,000 = 30,000 x 2,800,000 = 8.410 (Contribution)
85,000 – 55,000 = 30,000 x 1,600,000 = 4.810 (Absorption)
4. If E sells 10,000 additional units, how much better off is the company financially?  Which income method did you use?  Please explain and show your computations.
Product Information: | | |
| | |
Units Produced | 400,000 | |
Units Sold | 355,000 | |
Selling Price per Unit | $19.00 | |
Direct Material Cost per Unit | $3.50 | |
Direct Labor Cost per Unit | $1.40 | |
Variable Selling Costs per Unit | $1.20 | |
Fixed Manufacturing Costs | $1,600,000 | |
Fixed Selling & Administrative Costs | $1,200,000 | |
| | |
| | |
Absorption (GAAP) Income | |
| | |
Revenues (Sales) | | $6,745,000 |
Cost of Goods Sold (Cost of Sales) | | 3,159,500 |
Gross Profit (Gross Margin) | | $3,585,500 |
Selling & Administrative Expenses | | 1,626,000 |
Operating Income | | $1,959,500 |

Contribution Margin Income Statement | |
| | |
Revenues (Sales) | | $6,745,000 |
Variable Costs: | | |
Direct Material | $1,242,500 | |
Direct Labor Cost | 497,000 | |
Variable Selling Expenses | 426,000 |   |
Total Variable Costs | | $2,165,500 |
Contribution Margin | | 4,579,500 |
Fixed Costs | | 2,800,000 |
Operating Income | | $1,779,500 |
Net Operating Income (NOI) is used when calculating the Operating profit ratio of a firm.
Operating Profit Margin = Net Operating Income (NOI) / Net Sales
(Contribution) 
1,779,500 / 3,585,500 = .49630456 (50%)
47% to 50% your able to see your sales changes being reported within the company’s reporting vs. absorption when it hidden within the report.

5. Which costing...

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