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# Contribution margin, cash flow, target cost, variances

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1. Explain the difference between a traditional income statement and a contribution margin income statement by providing the following three items:

*present a sample format for each statement
*describe the focus of each statement
*discuss how and by whom each statement is used

2. Your company acquires production equipment by trading an older machine and giving the seller 100 shares of company stock. How should this transaction be reported on the statement of cash flows?

3. A manufacturer is developing a new type of vacuum cleaner that will have a target price of \$450.To maintain the target profit equal to 35 percent of the new product's cost, what will the target cost be?

4. Gantt Textile Inc. incurred actual variable overhead expenses of \$50,000 in the current year for the production of 6000 units. Variable overhead was applied at a rate of \$3.25 per direct labour hour, and 2 direct labor hours were budgeted for each unit. The company used 16,000 direct labor hours for production. Compute the variable-over-head spending variance and the variable-overhead efficiency variance. Indicate whether each variance is favorable (F) or unfavorable (U).

#### Solution Preview

1. Explain the difference between a traditional income statement and a contribution margin income statement by providing the following three items:
*present a sample format for each statement
*describe the focus of each statement
*discuss how and by whom each statement is used

Present a sample format for each statement:

Sales
Less Cost of goods sold (Product costs: direct material, direct labor, variable manufacturing overhead and fixed manufacturing overhead)
---------------------------------------------------------------------------------------------------------------------------
Gross Profit
Less Operating expenses (Period cost: Variable and Fixed Selling and Administrative expenses)
---------------------------------------------------------------------------------------------------------------------------
Net income before taxes
Less income tax
---------------------------------------------------------------------------------------------------------------------------
Net income after taxes

Contribution margin income statement:
Sales
Less Variable Cost of goods sold (direct material, direct labor, variable manufacturing overhead)
---------------------------------------------------------------------------------------------------------------------------
Product Contribution margin
Less Variable Operating expenses (Variable Selling and Administrative expenses)
---------------------------------------------------------------------------------------------------------------------------
Contribution margin
Less Fixed ...

#### Solution Summary

Answers questions on raditional income statement vs contribution margin statement, statement of cash flows, target cost and variances.

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