TD-Absorption Income versus Contribution Margin Income

TD-Absorption Income versus Contribution Margin Income -...

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Absorption Income versus Contribution Margin Income The background materials present the computations for both gross profit on sales and contribution margin. Can you give specific benefits to be derived from using the information from computing gross profit on sales as opposed to contribution margin? Is net income always going to be the same regardless of the accounting approach? Why don't we use the contribution margin format for external reporting? Which income statement is classified by function, and which one is classified by behavior? Look at the income statements below before you answer the questions.
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Unformatted text preview: ABC Company sells 10,000 widgets. The company has no beginning or ending inventory. Using the absorption approach (GAAP) the net income of the company is as follows: Sales (10,000 @ $20) $200,000 Cost of goods sold (10,000 @ $12) 120,000 Gross profit $ 80,000 Expenses 20,000 Net income $ 60,000 Using the contribution margin approach the net income of the company is as follows: Sales (10,000 @ $20) $200,000 Variable cost of goods sold (10,000 @ $8) 80,000 Contribution margin $120,000 Fixed expenses 60,000 Net income $ 60,000...
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This note was uploaded on 10/15/2011 for the course ACCT 201 taught by Professor Anothony during the Spring '10 term at Trident Technical College.

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