Nintendo2010 - Magdalena Sowa Solution 1: This method is...

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Magdalena Sowa Solution 1: This method is very useful for the calculation of B.E.P. and its applications. Contribution means difference between sales and the variables (or marginal) cost of sales. In other words, the excess of sales over its variable costs is called contribution. If the amount of contribution is less than fixed cost, it will be a position of loss to the firm and if it is equal to fixed cost, it will be situation of no profit and no loss. Contribution margin analysis shows the ratio between contribution and sales. There are differences between the conventional income statement and contribution margin income statement. In conventional income statement, fixed and variable expenses both are deducted from sales so as to calculate net profit. But in the case of contribution margin statement, only the variable expenses are deducted from sales. Conventional income statements are mandatory for a company to prepare and it’s a part of financial accounting but contribution income statement is not mandatory and it’s a part of cost accounting. Solution 2: As the company’s margin has slowed down which has lead to increase in sales volume so the revenue didn’t increase up to a significant level. Also the company is in a mood to develop its own software and also want to purchase franchises so all this will ultimately lead to increase in fixed cost of the company. So the contribution margin may increase but the profit margin will decline due to increase in fixed cost. If we will apply the CVP analysis then then we can observe that the company is making increasing profits in some of the products and in some of the products their profits are reducing. Regular income statement generally shows all the operating and non operating incomes which are to be deducted from gross profit to arrive at net profit. But in the contribution margin statement we just deduct variable cost from sales to calculate contribution. Also in the regular income statement there is no distinction between the variable cost and fixed cost but there is a difference in these types of cost in contribution margin statement. Also we just show the manufacturing related expenses in the contribution margin statement as it is a part of cost accounting but in regular income statement we show all the expenses related to business.
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This note was uploaded on 03/08/2012 for the course ACCOUNTING 601 taught by Professor Ezo during the Spring '12 term at Cornell University (Engineering School).

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Nintendo2010 - Magdalena Sowa Solution 1: This method is...

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