Contribution Income Statement
Sales (9000 units sold)
Product costs (120+60=40)x9000
Selling and admin 10×9000
Contribution Margin (70 per unit)
Selling and administrative
Net Operating Income
The net income on the contribution income statement is $25,000 lower than the $305,000 on the absorption income statement because $25 in fixed expenses is assigned to each unit cost (Accounting for Management, 2012). Where 10,000 units were produced, but only 9,000 sold, that leaves 1,000 units in inventory. The additional $25,000, 25 x 1,000, is listed in the inventory account.
Contribution Margin Income Statement
Sales 9,000 units at 330
Selling and admin 10×9,000
Selling and admin
Break even Analysis
250 ea unit
210 ea unit
Sales 1100 units
Direct Material at 110 per unit
Direct Labor at 60 per unit
Variable Overhead at 40 per unit
With the selling price at 250 per unit, the contribution margin is 40 per unit (44,000/1100). If the selling price is 210 per unit, the contribution margin is zero. The decision needs to be declined because of ensuring that proper equipment is available, ensuring the needed skill of labor, allocated fixed overhead, after sales-service, and the risk involved of defective product (Brewer, 2010). Other variable costs, such as equipment maintenance, fluctuating material costs, as well as others, can change the contribution margin. With a narrow contribution margin, there is the risk of completing the order and just breaking even without benefit to the company, or even having a loss in the end. In manufacturing, there is also the consideration of environmental costs, such as pollution.
Accounting for Management. (2012). Retrieved from Income Comparison for variable and absorption costing: http://accounting4management.com/incom…mparison_of_variable_and_absorption_costing.htm
Brewer, P.C. (2010). Introduction to Managerial Accounting. New York, NY: McGraw Hill.
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