Transcript Slide 1

CHAPTER 1 MODULE 1
Chapter
12 Module 4
AMIS 310
Foundations of Accounting
Professor Marc Smith
Chapter 12 Module 4: Income Statement
TRADITIONAL INCOME STATEMENT FORMAT
Sales Revenue
- Cost of Goods Sold
Gross Profit
- S&A Expenses
Net Income
NOTE: This is the traditional income statement
format where the expenses are classified
by function.
Chapter 12 Module 4: Income Statement
The traditional income statement format is not
used for internal decision-making. Instead,
managers prefer to classify expenses by cost
behavior as follows:
Sales Revenue
- Variable Costs
Contribution Margin
- Fixed Costs
Net Income
NOTE: This is the contribution income statement
format where the expenses are classified
by cost behavior pattern.
Chapter 12 Module 4: Contribution Margin
Contribution margin represents the amount
of revenue that is available to:
1.
pay (cover) fixed costs
2.
contribute toward a profit
Chapter 12 Module 4: Contribution Margin
Contribution margin can be expressed in 3 different
ways:
1.
Total contribution margin =
Sales Revenue - Variable Costs
2.
Contribution margin per unit =
Selling price per unit - Variable costs per unit
Chapter 12 Module 4: Contribution Margin
3. As a percentage of sales
(called the contribution margin ratio) =
Contribution Margin ÷ Sales Revenue
OR
CM per unit ÷ Selling price per unit
Chapter 12 Module 4: Contribution Margin
The key to this very important concept lies in
understanding cost behavior patterns.
As revenues increase as a result of selling more
products or providing more services, variable
costs will increase proportionately, and so will
contribution margin.
However, fixed costs will not increase because
they are NOT a function of the level of revenuegenerating activity
Chapter 12 Module 4: Example #2
1.
Variable cost per unit = 109 - 18
Variable cost per unit = $91
Sales revenue
Variable costs
Cont. margin
Fixed costs
Net income
69,750 [250 units x $279]
22,750 [250 units x $91]
47,000
40,000
7,000
Chapter 12 Module 4: Example #2
2.
Units sales =
300 x 1.50
=
450 units
Sales revenue
Variable costs
Cont. margin
Fixed costs
Net income
115,650 [450 units x $257]
49,050 [450 units x $109]
66,600
60,000 [40,000 + 20,000]
6,600
Chapter 12 Module 4: Example #2
3.
Units sales = 300 x 1.12 = 336 units
Sales revenue
Variable costs
Cont. margin
Fixed costs
Net income
93,744 [336 units x $279]
29,904 [336 units x $89]
63,840
50,000 [40,000 + 10,000]
13,840