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contribution format vs traditional income statement

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Prepare a memo to your CFO which does the following:

1.Summarize what a contribution format income statement depicts, as compared to the traditional format.
2.Using the following company data, show how the two income statement formats would look side by side.
3.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%.
4.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 is attached in Excel and below. A traditional and contribution margin income statement is presented and discussed (briefly). This is enough materials for you to start your own memo or discussion (memo is not provided).

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

The contribution margin format reorganizes expenses. Instead of grouping product and non-product costs (traditional format with gross profit subtotal to show profit after product costs), the contribution margin format shows profit after ...

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