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CONTRIBUTION FORMAT INCOME
STATEMENT
Key Topics to Know
- The contribution format income statement is an alternative format to the absorption income statement. It is useful for internal decision-making and analysis.
- However, since it is not GAAP, it cannot be used for external reporting.
- Based on behavior of revenues and costs, not their function.
- Key intermediate subtotal is Contribution Margin, which is not the same as gross margin.
- Sales – variable costs and expenses = contribution margin
- Gross margin + fixed overhead costs – variable selling and administrative costs = contribution margin
- It is always helpful to know the units sold for a contribution format income statement.
Problems
Problem # University Store, Inc.’s first quarter income statement is presented below: Sales $800, Cost of Goods Sold 560, Gross Margin 240, Less: Operating Expenses: Selling Expenses $100, Administrative Expenses 110,000 210, Net Income $ 30, Since the University store is a retailer, cost of goods sold is a variable expense. Selling expenses are 40% fixed and variable administrative expenses are 5% of sales. Required: a) Calculate the contribution margin and contribution margin ratio for the first quarter. b) Prepare a contribution format income statement for the first quarter. Problem # Oakes Corporation, which has only one product, has provided the following data concerning its most recent month of operations: Selling price $ Units; Beginning inventory 0 Produced 1, Sold 900 Ending inventory 200 Variable costs per unit Direct materials $ Direct labor $ Manufacturing overhead $ Selling and administrative expenses $
Multiple Choice Questions
1. S Company^ produces cat condos that sell for $90 each. Direct materials cost $
per unit, and direct labor costs $10 per unit. Manufacturing overhead is applied at a rate of 200% of direct labor cost. Nonmanufacturing costs are $27 per unit. What is the gross profit margin for the cat condos? a) 20.0% b) 50.0% c) 62.5% d) 80.0%
2. L Company^ manufactures chainsaws that sell for $60. Each chainsaw uses $10 in
direct materials and $3 in direct labor per unit. L Company has two activities: Machining, which is applied at the rate of $2 per machine hour, and Finishing, which is applied at the rate of $20 per batch. This month, Logan made 200 chainsaws, using 1,000 machine hours in 40 batches. What is the gross profit for 2 00 chainsaw? a) $2, b) $5, c) $6, d) $9,
3. The amount remaining from sales revenue after all variable expenses have been
deducted is: a) Gross margin b) Gross profit c) Contribution margin d) Fixed costs
4. Comparing the contribution income^ statement to the absorption income
statement, the only two items that must be the same are: a) net sales and cost of goods sold b) cost of goods sold and fixed expenses c) variable expenses and cost of goods sold d) net sales and net income
5. B^ Company is a honey wholesaler. An income statement and other data for the
second quarter of the year are given below: B Company Income Statement For the Quarter Ended June 30 Sales $960, Cost of goods sold 420, Gross margin 540, Selling and administrative expenses: Selling 200, Administrative 75, Net operating income $265, Other data: Average selling price $60 per unit Selling expenses Fixed selling expenses plus 8% of sales Administrative expense Fixed administrative expenses plus $2 per unit Net operating income for the second quarter using the contribution approach is: a) $156, b) $685, c) $431, d) $265,
6. G Company^ produces and sells a single product. The company has provided its
contribution format income statement for February. Sales (5,600 units) $358, Variable expenses 229, Contribution margin 128, Fixed expenses 108, Net operating income $20, If the company sells 5,700 units, its net operating income should be closest to: a) $20, b) $22, c) $20, d) $26,
Solutions to Problems
- Problem #
- Units sold 20,
- Sales $800,
- Cost of goods sold 560, Variable expenses:
- Selling 60,
- Administrative 40,
- Contribution margin (17.5%) 140,
- Selling 40, Fixed expenses:
- Administrative 70,
- Operating income $30,
- Problem #
- Direct materials $2 a. Unit product cost under variable costing:
- Direct labor
- Variable manufacturing overhead
- Variable cost per unit $
- Sales $97, Variable costing income statement
- Cost of goods sold 58,5 Variable expenses:
- Selling and administrative 9,90
- Contribution margin 28,8
- Manufacturing overhead 14,3 Fixed expenses:
- Selling and administrative 1,8
- Operating income $12,7
- Direct materials $ b. Unit product cost under absorption costing:
- Direct labor
- Variable manufacturing overhead
- Fixed manufacturing overhead
- Absorption cost per unit $
- Sales $97, Absorption costing income statement
- Cost of goods sold 70,20
- Gross margin 27,0
- Selling and administrative 11,7
- Operating income $15,3
- Problem #
- Sales $2,000, Income Statement
- Cost of goods sold 1,200, Variable expenses:
- Commissions 10 0,
- Shipping expenses 40,
- Contribution margin $660,
- Depreciation expense 15 0, Fixed expenses:
- Salaries expense 260,
- Advertising expense 8 0,
- Operating income $170,
- Problem #
- Increase in inventory
- Fixed overhead per unit $
- Fixed overhead deferred $2,
- Variable costing operating income $55,
- Fixed overhead per unit 2,
- Absorption costing operating income $58,
