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Managerial Accounting
E-Company
Income Statement
Contribution Margin
For Period Ended Dec 31, 20XX
Revenue
less V Mfg Cost
less V Op/Selling Cost
Gross Profit (Contribution Margin)
Fixed Mfg Overhead
Fixed S&A Exp
Total Fixed Costs
Net Income
$4,765,000
E-Company Income Statement
Absorption Method
For Period ended Dec 31, 20XX
Revenue
Less Mfg Cost
Less Op/Selling Cost
Less S&A Exp
Net Income
$5,485,500
The gross profit margin is 75.6%. This is calculated as the (revenue -- cogs) / revenue (Investopedia, 2011). The contribution margin is similar, but does not include costs associated with goods still sitting in inventory. It would be more easily calculated as (29 -- 1.2 -- 4.9) / 29 = 78.9%.
The net margin should be calculated on the basis of the GAAP income statement, so in that case it would be $4,765 / $10,005 = 47.6%. If the net margin was calculated on the basis of the absorption income statement, the net margin would be (5485.5...
The first point of difference is with respect to what is included in the income statement. Under the absorption approach, only the costs associated with the 345,000 units sold would be included. The costs associated with the 45,000 units still in inventory will be included when those units are sold. With the variable approach, the full costs for the year are included. The result is that under the absorption method, when the production is higher than the sales, the absorption method will result in a higher net income (Heier, no date).
This is also true for the fixed costs. In absorption costing, the fixed costs are allocated by sales, so they are lower than under variable costs. In addition, the absorption method does not differentiate between fixed and variable costs. So under "manufacturing cost" are costs that in the variable method would be listed as "variable" and "fixed."
If the company sold an addition 10,000 units, this would have an impact on revenue for both sides, but it would only change the costs on the absorption side, since the cost associated with producing…
Works Cited:
Heier, J. (no date). Absorption vs. variable costing. Biz.aum.edu. Retrieved November 25, 2011 from http://www-biz.aum.edu/janheier/ABSORB2020.htm
Investopedia (2011). Gross profit. Investopedia.com. Retrieved November 25, 2011 from http://www.investopedia.com/terms/g/grossprofit.asp#axzz1ekdqCYf5
Investopedia. (2011). Contribution margin. Investopedia.com. Retrieved November 25, 2011 from http://www.investopedia.com/terms/c/contributionmargin.asp
This is the result of the decline in inventory levels. If the inventory levels had not changed, there would have been no difference between the net profit for the two methods. If the company sold another 10,000 units, it would have a higher profit. This calculation was based on the contribution margin method. What occurs in this method is that the company sells more, but it does not produce more.