1. AMIS 310 Foundations of Accounting
Chapter 12 Module 4
CHAPTER 1 MODULE 1
AMIS 310 Foundations of Accounting
Professor Marc Smith

2. 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.

3. 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.

4. 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

5. 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

6. 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

7. 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

8. Chapter 12 Module 4: Example #2
1. Variable cost per unit =
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

9. Chapter 12 Module 4: Example #2
2. Units sales = x = 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]
Net income ,600

10. Chapter 12 Module 4: Example #2
3. Units sales = x = 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]
Net income 13,840