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 & Administrative Costs | $1,200,000 | | | | | | | | Absorption (GAAP) Income | | | | | Revenues (Sales) | | $6,555,000 | Cost of Goods Sold (Cost of Sales) | | 3,070,500 | Gross Profit (Gross Margin) | | $3,484,500 | Selling & Administrative Expenses | | 1,614,000 | Operating Income | | $1,870,500 | | | | | | | Contribution Margin Income Statement | | | | | Revenues (Sales) | | $6,555,000 | Variable Costs: | | | Direct Material | $1,207,500 | | Direct Labor Cost | 483,000 | | Variable Selling Expenses | 414,000 | | Total Variable Costs | | $2,104,500 | Contribution Margin | | 4,450,500 | Fixed Costs | | 2,800,000 | Operating Income | | $1,650,500 | | | |

2. What are E's contribution margin ratio, gross profit ratio and operating (net) income ratios?
Contribution margin ratio:
Calculate contribution margin ratio
P = (sales x cm ratio) – fixed cost
Sales 6,555,000 Profit 3,484,500 Fixed cost 2,800,000
3,484,500(6,555,000 x cm ratio) – 2,800,000
3,484,500 + 2,800,000 = (6,555,000 x cm ratio)
Cm ratio = 6,284,500 / 6,555,000
=0.958733791 (96%)

Gross profit ratio: