Identify the cost categories in a traditional format income statement

Cost Accouning

In your monthly Chamber of Commerce meeting you heard that some of your peers running other businesses changed from a traditional income statement approach to a contribution margin approach. Your peers said this helps show the importance of volume levels to the businesses profitability.

You know that by using the contribution format income statement you can change what projected profits look like by changing your classification of fixed vs. variable type costs.

Prepare a memo to your CFO which does the following:

Summarize what a contribution format income statement depicts, as compared to the traditional format.
Using the following company data, show how the two income statement formats would look side by side.
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%.
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 sales

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

Please submit your assignment.

The following rubric will be used for grading:

Grading Rubric

10%

Explain what a contribution-format income statement depicts as compared with the traditional format.

30%

Using the company data, show how the 2 income statement formats would look side by side.

15%

Explain exactly why the contribution approach is more useful to project profits.

15%

As an example, show your calculations when using a projected sales increase of 20%.

15%

Identify and explain the ethical issues involved when you can change what projected profits look like by changing your classification of fixed versus variable costs.

15%

Using the data, show how expected profits would be different if there were a sales increase of 10% and the CFO used variable COGS of 50% vs. 60%.

Individual Project One Template

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

Please discuss

Part 2: Using the following company data, show how the two income statement formats would look side by side.

Traditional- versus contribution-format statements are as follows:

Traditional format

Sales

1.COGS

Gross margin

SG&A

Profit

Calculation of cost of goods sold

Variable

Variable cost as a 60% of sales (need to be calculated) +Fixed costs of manufacturing (given)

Contribution format

Sales

2. Variable COGS

Other variable expenses

=Contribution margin

Fixed COGS

Other Fixed costs

=Profit

Variable COGS

Variable cost as a 60% of sales (need to be calculated)

Part 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%.

Please discuss and make the following calculation

Sales

Contribution margin

3. Fixed costs

Projected profit

3. Fixed cost =

Fixed costs of manufacturing + Fixed selling and administrative costs

Part 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.

60% COGS

50% COGS

Sales with 10% increase

Less: Variable COGS

Less: Other variable costs

Contribution margin

Fixed COGS

Other fixed costs

Profit