¶ … Margin

Contribution Income Statement

Sales (9000 units sold)

2,700,000

Variable Expenses

Product costs (120+60=40)x9000

1,980,000

Selling and admin 10x9000

Contribution Margin (70 per unit)

Fixed Expenses

Manufacturing Overhead

Selling and administrative

Net Operating Income

The net income on the contribution income statement is $25,000 lower than the $305,000 on the absorption income statement because $25 in fixed expenses is assigned to each unit cost (Accounting for Management, 2012). Where 10,000 units were produced, but only 9,000 sold, that leaves 1,000 units in inventory. The additional $25,000, 25 x 1,000, is listed in the inventory account.

Contribution Margin Income Statement

Sales 9,000 units at 330

2,970,000

Variable Expenses

Production (120+60+40)x9,000

1,980,000

Selling and admin 10x9,000

90,000

2,070,000

Contribution Margin

9,000,000

Fixed Expenses

Manufacturing Overhead

250,000

Selling and admin

100,.000

350,000

Net Income

550,000

Break even Analysis

0+350,000/(900,000/9,000)

0+350,000/100=3500 units

(150+60+40)/9,000=2,340,000

2,970,000-2,340,000=70

0+350,000/70=5000 units

Part II

Manufacturing Decision

Selling Price

250 ea unit

210 ea unit

Sales 1100 units

275,000

231,000

Variable Expenses

Direct Material at 110 per unit

121,000

121,000

Direct Labor at 60 per unit

66,000

66,000

Variable Overhead at 40 per unit

44,000

231,000

44,000

231,000

Contribution Margin

44,000

0

With the selling price at 250 per unit, the contribution margin is 40 per unit (44,000/1100). If the selling price is 210 per unit, the contribution margin is zero. The decision needs to be declined because of ensuring that proper equipment is available, ensuring the needed skill of labor, allocated fixed overhead, after sales-service, and the risk involved of defective product (Brewer, 2010). Other variable costs, such as equipment maintenance, fluctuating material costs, as well as others, can change the contribution margin. With a narrow contribution margin, there is the risk of completing the order and just breaking even without benefit to the company, or even having a loss in the end. In manufacturing, there is also the consideration of environmental costs, such as pollution.

Bibliography

Accounting for Management. (2012). Retrieved from Income Comparison for variable and absorption costing: http://accounting4management.com/incom...mparison_of_variable_and_absorption_costing.htm

Brewer, P.C. (2010). Introduction to Managerial Accounting. New York, NY: McGraw Hill.