An Income Statement for an E-Company: Differences between the Contribution Margin Method and the Absorption Method

The change in the contribution margin for all the products is responsible for the change in profitability.

The difference between net income and profits adjusted for current cost of supply comes down to the way inventories are accounted for.

cognizant of the fact that the choices he makes can affect the price a buyer pays

1. An advantage of using the weighted average method involves the consistent product cost used. After the accountant calculates the product cost, he uses that cost for all units. This includes the cost used for the ending inventory value as well as the cost of goods sold. (McIntosh, n.d.)

| be used in the computation of net operating income but not in the computation of the contribution margin

The purpose and goal behind researching the income statements and balance sheets then calculating the ratios is mainly to help creditors and investors make their decisions easier and faster. The way we are presenting our research results helps the investors and creditors make the decision which of the companies is more worthy to invest in or loan money too without taking a risk, and lowering the chances that they will be disappointed by the results of their investment, or in the creditors case they can be almost certain the company they are loaning the money to would be worthy enough of paying the money back without a hassle.

After a thorough discussion and analysis of the given data, we have chosen alternatives number one which is to increase the selling price and number three to decrease the variable costs since it generates higher contribution margin ratio which we considered to be the determinant in achieving the 176m profit. The contribution margin ratio tells a company how much of the contribution margin of its products change in response to an increase or decrease in sales volume. As the sales increases the contribution margin also will increase and will have an equivalent increase in profit.

3. Store equipment of $44,000 was purchased by signing a short-term note payable. Also, a $150,000 telecommunications system was acquired by issuing 3,000 shares of preferred stock.

The contribution margin is the difference between per unit revenue and per unit variable cost (the variable cost rate). It is the dollar amount per visit available to cover fixed costs. If the fixed costs are high (provider B), then the impact of the contribution margin on the profit is low.

QuickBooks and Sage 50 Accounting are both great options for small business accounting. These programs help manage business finances which can drastically save time that may have been spent creating Excel spreadsheets and more. However, while both programs are sufficient for small businesses, the programs differ based on what they can offer your company.

A customer walks into her local Wal-Mart Supercenter to purchase a few necessities and Christmas gifts. Once the customer has found everything on her list, she goes to the nearest register to pay for her items. Her groceries totaled $102.50, her pet food cost $21.60, the videogame she picked out for her nephew is $80.00, and finally she purchased two Wal-Mart gift cards totaling $50.00. Even though the customer’s total sale is $279.10, Wal-Mart cannot recognize any of the revenue unless the transaction meets all of the criteria listed in IAS-18. IAS-18 is an accounting regulation that mandates how companies are to determine whether or not a transaction constitutes the recognition of revenue. Revenue regularly comes from the sale of goods or prepayment for services to be rendered, however, it can only be recognized if there is an economic benefit on behalf of the seller and the reliability of the revenue is provable. Wal-Mart is in the business to sell goods to customers, so they can only recognize revenues from completed transactions that are reliable in nature (IAS-18 Revenue 2009).

The difference in a traditional income statement and a contribution margin income statement is how the variable and fixed costs are used. A contribution margin income statement in an income statement that shows all variable expenses to be deducted from sales. This, in turn, provides a contribution margin, and then all fixed expenses are subtracted to provide the net profit or loss (Accounting for Management, n.d.) . The contribution margin income statement uses the variable costing method (Basu, n.d.). Instead of being part of the product costs, the fixed manufacturing costs are included in the overhead costs. Behavioral structure of the business is the driving force for the contribution margin income statement (Sawyers, Jackson, & Jenkins,

(2). “Gross Profit = Sales – Cost of Goods sold” = “Sales” ($16,000) – “Cost of Goods sold” ($32,000)

Arroyo Corporation produced and sold 80,000 units and reported sales of $4,000,000 during the past year. Management determined that variable expenses totaled $2,800,000 and fixed expenses totaled $720,000. What is the company 's contribution margin ratio?

Ahmed, A., McAnally, M., Rasmussen, S. & Weaver, C. (2010). How costly is the sarbanes oxley act? Evidence on the effects of the act on corporate profitability. Journal of Corporate Finance, 16, 352-369.