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# Absorption Income and Contribution Margin Income Statement

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Europa Publications, Inc. specializes in reference books that keep abreast of rapidly changing political and economic issues in Europe. The results of the company's operations during the prior year are given in the following table. All units produced during the year were sold. (Ignore income taxes.)

Sales revenue.............................................. \$ 2,000,000
Manufacturing costs:
Fixed:.........................................................500,000
Variable......................................................1,000,000
Selling costs:
Fixed............................................................50,000
Variable.......................................................100,000
Fixed..........................................................120,000
Variable..........................................................30,000

1. Prepare a traditional income statement and a contribution income statement for the company.

2. What is the firm's operating leverage for the sales volume generated during the prior year?

3. Suppose sales revenue increases by 10 percent. What will be the percentage increase in net income?

4. Which income statement would an operating manger use to answer requirement (3)? Why?

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#### Solution Preview

Please see the attached file

1. Prepare a traditional income statement and a contribution income statement for the company.
In the traditional form, the costs are grouped by function. The fixed and variable costs are added together.
Cost of goods sold = Total manufacturing cost = 500,000+1,000,000=1,500,000.
EUROPA PUBLICATIONS, INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20XX
Sales \$2,000,000
Less: Cost of goods sold 1,500,000
Gross margin \$ ...

#### Solution Summary

The solution explains how to prepare a absorption income and contribution margin income statement and the related calculations.

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