Acc 403 Case

TUI University

Module 2 – Case Assignment

ACC 403 – Principles of Accounting

For this Case Assignment I will show prepared income statements for E-company utilizing both variable (contribution margin) and traditional (absorption margin) methods. I will also show E-company’s computed contribution margin ratio, gross profit ratio and operating (net) income ratios, as well as explain the difference and reconcile operating income for the two methods. Additionally, I will discuss which method I would recommend to the CFO and why.

INCOME STATEMENTS:

Variable Costing Contribution Statement

Sales: $10,005,000
Variable expenses: Variable cost of goods sold $1,690,500 Variable selling and administrative expense $414,000
Total variable expenses: $2,104,500
Contribution margin: $7,900,500
Fixed expenses: Fixed manufacturing overhead $1,600,000 Fixed selling and administrative expense $1,200,000
Total fixed expense: $2,800,000
Net operating income: $5,100,500

TRADITIONAL Costing ABSORPTION Statement

Sales $10,005,000
Cost of goods sold $3,290,500
Gross margin $6,714,500
Selling and administrative expenses $1,614,000
Net operating income: $5,100,500

What are E-companys contribution margin ratio, gross profit ratio and operating (net) income ratios?

The Contribution Margin Ratio for E-Company is 79%. I calculated this by dividing the contribution margin amount by total sales and then checked it by dividing the total variable costs by the unit price. The Gross Profit Ratio for E-Company is 67%. And the Operating Income Ratio is 51%.

E-COMPANY SELLS AN ADDITIONAL 10,000 UNITS

Sales: $10,295,000
Variable expenses: Variable cost of goods sold $1,739,500 Variable selling and administrative expense $426,000