Analyze income statements using contribution margin
Not what you're looking for?
The E-Company manufactures trendy, high-quality moderately priced watches that it sells on the Internet. As the company's senior financial analyst, you are asked to analyze the overall profitability fo the current year. The CFO has heard that there are two different approaches for preparing income statment.s You are asked to show the CFO both approaches and explain the advantages or disadvantes of each method. The following data are for the year ended December 31, 2009:
Production capacity is 400,000 units
Beginning inventory, January 1: 85,000 units
Ending inventory, December 31: 55,000 units
Sales for the year are: 345,000 units
Selling price (to distributor) $19.00 per unit
Variable manufacturing cost per unit, including direct materials of $3.50 and direct labor of $1.40
Variable operating/selling cost per unit sold $1.20
Fixed manufacturing overhead $1,600,000
Fixed sellling & administrative expenses $1,200,000
Assume costs per unit are the same for units in beginning inventory and units produced during the year. Also, assume the prices and unit costs did not change during the year.
Requirement:
Prepare income statements under variable (contribution margin) and traditional (absorption) costing for the year ended December 31, 2008.
What are E's contribution margin ratio, gross profit ratio and operating (net) income ratios?
Explain the difference and reconcile operating income for the two methods.
If E sells 10,000 additional units, how much better off is the company financially? Which income method did you use? Please explain and show your computations.
Which costing method would you recommend to the CFO? Why?
Purchase this Solution
Solution Summary
The Solution analyze income statements using contribution margin & absorption for E-Company.
Purchase this Solution
Free BrainMass Quizzes
Employee Orientation
Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.
Organizational Leadership Quiz
This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.
Organizational Behavior (OB)
The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.
SWOT
This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.
Managing the Older Worker
This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce