AMIS 310 Foundations of Accounting Chapter 12 Module 4 CHAPTER 1 MODULE 1 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 revenue-generating activity

Chapter 12 Module 4: Example #2 1. Variable cost per unit = 109 - 18 Variable cost per unit = $91 Sales revenue 69,750 [250 units x $279] Variable costs 22,750 [250 units x $91] Cont. margin 47,000 Fixed costs 40,000 Net income 7,000

Chapter 12 Module 4: Example #2 2. Units sales = 300 x 1.50 = 450 units Sales revenue 115,650 [450 units x $257] Variable costs 49,050 [450 units x $109] Cont. margin 66,600 Fixed costs 60,000 [40,000 + 20,000] Net income 6,600

Chapter 12 Module 4: Example #2 3. Units sales = 300 x 1.12 = 336 units Sales revenue 93,744 [336 units x $279] Variable costs 29,904 [336 units x $89] Cont. margin 63,840 Fixed costs 50,000 [40,000 + 10,000] Net income 13,840