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Contribution Margin, Gross Profit, Managerial accounting

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1. What are the similarities between contribution margin and gross profit.
2. Steven started ZZ Tire Company 10 years ago. The company started as an installer and seller of tires. The company has now expanded to the point where they now manufacture tires in China to supply the retail stores. They have retail sales of over $10 Million a year. Right now, the only accounting that takes place is regular bookkeeping for tax purposes. The company performs no managerial accounting. Write out a couple of paragraphs where you tell Steven why he should implement managerial accounting, and explain to him what managerial accounting is. Go through basic points explaining why it is important to implement managerial accounting.

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Gross profit is the difference between sales and cost of goods sold. Contribution margin is sales per unit minus variable costs per unit. Both contribution margin and gross profit are similar in nature that these two allow a firm to make production decisions. In both the cases, the sales figure and variable expenses are used from the income statement and variable expenses are reduced. However, in the case of gross profit, the costs of goods ...

Solution Summary

This solution of 240 words discusses similarities between contribution margin and gross profit as well as discusses benefits of managerial accounting. References used are included.

See Also This Related BrainMass Solution

Managerial Accounting and Financial Statements

1. Financial Statements: Cash and Net Income:
Traditional measures of financial and managerial accounting are often based on net income. However, net income is not the actual cash available to a given firm. As such, most bankrupt companies do not have sufficient liquidity (cash or assets easily convertible to cash) to cover pressing obligations. I need to know the relative importance of net income versus cash in the financial management of any company. Should I focus more on cash management? Why or why not.

2. Contribution Margin vs. Gross Profit:
Briefly outline the relative importance of Gross Profit on Sales and Contribution Margin used on financial statements.

3. Pricing Decision:
I understand that poor decision making may result when acceptable prices are determined by adding a fixed percentage to the "full cost" of a product when that "full cost" includes a unitized fixed cost. The lesson learned is that any selling price above the contribution margin will add to the wealth of the firm. This being the case, is there a danger in the decision rule that states "always accept any offer that has a positive contribution margin?" (I'm relating this question to the short term and long term profitability of the firm).

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