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Fixed vs. variable costs

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You know that by using the contribution format income statement you can change what projected profits look like by changing your classification of fixed vs. variable type costs.

Summarize what a contribution format income statement depicts, as compared to the traditional format.
Using the following company data, show how the two income statement formats would look side by side.
Explain why the contribution approach is more useful to project profits. As an example, show your calculations when using a projected sales increase of 20%.
Using the following data, show how expected profits would be different if there was a sales increase of 10% and she used variable COGS of 50% vs. 60%. As an offset, this implies an increase in fixed COGS of $1,000,000.
Company Data to use for Parts 2 & 4

Last year's sales

$10,000,000

Variable cost as a % of cost of goods sold

60%

Fixed costs of manufacturing

$2,000,000

Variable selling and administrative costs as % of sales

10%

Fixed selling and administrative costs

$1,000,000

Reported profit

$0

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Solution Summary

Your tutorial includes four income statements in Excel and a brief response to the two questions posed. Two alternative computations are given based on the changing assumptions for fixed and variable costs.

Solution Preview

** See attached for computations and formats in Excel. Click in cells to see computations. **

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Summarize what a contribution format income statement depicts, as compared to the traditional format. ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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