700-1000 WORDS
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:
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%. |
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