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A Discussion on Cost Behaviour and Cost-Volume-Profit Analysis

Eastman Kodak Company produces and sells cameras, film, and other imaging products. A condensed 2000 income statement follows (in millions):

Sales $13,994
Cost of goods sold 8,019

Gross Margin 5,975
Other operating expenses 3,761

Operating income $2,214

Assume that $1,800 million of the cost of goods sold is a fixed cost representing depreciation and other production costs that do not change with the volume of production. In addition, $3,000 million of the other operating expenses is fixed.

Please complete the following:
1. Compute the total contribution margin for 2000 and the contribution margin percentage. Explain why the contribution margin differs from the gross margin.
2. Suppose that sales for Eastman Kodak were predicted to increase by 10% in 2001 and that the cost behavior was expected to continue in 2001 as it did in 2000. Compute the predicted operating income for 2001. By what percentage did this predicted 2001 operating income exceed the 2000 operating income?
3. What assumptions were necessary to compute the predicted 2001 operating income in requirement 2?

Solution Preview

Please see the attached file for parts 1 and 2 of this problem.

Part 3:
Note: (1) Sales in 2001 increased by 10%. The cost of goods sold and other variable operating expenses will increase
in direct proportion to the sales volume.

(2) Fixed costs tend to remain the same in ...

Solution Summary

Attached in an Excel spreadsheet you will find an original income statement and a comparative income statement (contribution margin approach) for 2000 and 2001 under the revised conditions of sales volume and resultant change in variable costs. Part 3 of this problem is completed in about 175 words.