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Success Manufacturing Contribution margin Income Statement

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Success Manufacturing sold 540,000 units of its product for $72 per unit in 2011. Variable cost per unit is $54 and total fixed costs are $2,140,000.

a. Prepare a) contribution margin income statement, and b) an income statement.

b. If a new piece of machinery increases the fixed costs to $6,330,000 annually, but reduces the variable costs to $48 per unit, should the new piece of equipment be purchased? Why or why not? Show your work by preparing a new contribution margin income statement and income statement.

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Solution Summary

Your tutorial shows a contribution margin format income statement for the current situation and then again with the changes in costs from the new piece of machinery. The equipment should not be purchased as it reduces operating profit. This is highlighted with arrows to show the difference. There is a traditional income statement shown but since the facts of the problem did not indicate how much of the total fixed costs were product versus operating related, I assumed it was all operating costs.

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Your tutorial shows a contribution margin format income statement for ...

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