Absorption Income versus Contribution Margin Income
Can you give specific benefits to be derived from using the information from computing gross profit on sales as opposed to contribution margin? Is net income always going to be the same regardless of the accounting approach?
Why don't we use the contribution margin format for external reporting?
Which income statement is classified by function, and which one is classified by behavior?
Look at the income statements below before you answer the questions.
Using the contribution margin approach the net income of the company is as follows:
Sales (10,000@$20) $200,000
Variable cost of goods sold (10,000@8) $80,000
Contribution margin $120,000
Fixed expenses $60,000
Net income $60,000
Can you give specific benefits to be derived from using the information from computing gross profit on sales as opposed to contribution margin?
Gross profit Income Statement has the benefit of showing the reader the pricing power and the success in the market place. The gross margin indicates how much over the cost of the product the customers, on average, were willing to pay. This is the key value provided by the firm. After the gross profit there are only operating expense left to report. So, this is the only place that profits are made, except for minor gains and losses which are generally non-recurring. Gross profit is a key indicator of success in the market place and ...
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