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

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The income statement for E-Company using the contribution margin method is as follows: Revenue 10005000 COGS Beg Inv 0 COGM 1,960,000.0 End Inv 269500 Var selling 414000 2,104,500.0 Contribution Margin 7900500 Fixed Overhead 1600000 Fixed Admin 1200000 Net Income 5,100,500 The income statement for E-Company using the absorption method is as follows: Income Statement using Absorption Method Revenue 10,005,000 COGS Beg Inv 0 COGM 3560000 End 489500 COGS 3070500 Gross Profit 6,934,500 Var Selling 414000 Fixed Selling 1035000 Net Income 5,485,500 The ratios are as follows: Contribution Margin Ratio 78.97% Gross Profit Ratio 69.31% Net Profit Ratio (cont) 50.98% Net Profit Ratio (Ab) 54.83% There are a couple of differences between the two methods that give us the different results. The first is that under absorption, the manufacturing expenses (fixed and variable) are included in the calculation of the gross profit. The selling expenses are then calculated after that. Under the contribution method the structure is to include the variable expenses in cost of goods sold (contribution margin) and then take out the fixed costs. This might account for the differences between contribution margin and gross profit, but it does not account for the differences in the net income. This difference arises in that under absorption

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