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    Absorption Income versus Contribution Margin Income

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    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.

    ABC Company sells 10,000 widgets. The company has no beginning or ending inventory. Using the absorption approach (GAAP) the net income of the company is as follows:

    Sales (10,000@$20) $200,000
    Cost of goods sold (10,000@ $12) $120,000
    Gross profit $80,000
    Expenses $20,000
    Net Income $60,000

    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

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    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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