# MGM 5500: Questions and Answers

Pages: 7 (1205 words) Published: June 23, 2013
Course: MGM 5500

Assignment #6

A. What is the difference between a contribution income statement and a traditional income statement?

Contribution income statement is an income statement that classifies cost by behavior (fixed cost and variable cost). Traditional income statement is sometimes called the functional income statement. It is an income statement prepared in the multiple-step or single –step income statement format which conforms to Generally Accepted Accounting Principles (GAAP) and can be used for external financial reporting. The main difference between the two is that the contribution income statement list variable costs first, followed by fixed costs. Keeping in mind that GAAP and does not permit businesses to use the contribution income statement for financial accounting – it is used only for internal decision making purposes.

B. What is the difference between absorption costing and variable costing?

F. What is the contribution margin ratio and how does it differ from the contribution margin?

Contribution margin is the amount remaining after all variable costs have been deducted from sales revenue. It is an important piece of information for managers, because it tells them how much of their company’s original sales dollars remain after deducting variable cost. Contribution margin ratio is the contribution margin expressed as a percentage of sales. Contribution margin ratio can be calculate by dividing the total contribution margin by total sales or by dividing the per unit contribution margin by per unit selling prices.

Total contribution margin = Contribution margin ratio
Total sales
Or
Per unit contribution margin = Contribution margin ratio
Per unit selling price

6-15 Fresh Baked Cookie Company sells cookies in a large shopping mall. The following multiple-step income statement was prepared for the year ending December 31, 2008.

Income Statement
For the Year Ended December 31, 2008

Sales \$36,000
Cost of Goods Sold 4,000
Gross Profit \$32,000
Operating Expense:
Selling Expense \$18,000
Operating Income \$4,000

Cost of goods sold is a variable cost. Selling expense is 20% variable and 80% fixed, and administrative expensive is 5% variable and 95% fixed.

Required:
Prepare a contribution income statement for the Fresh Baked Cookie Company.