Contribution Margins for Lewis Company

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Contribution Margins for Lewis Company Lewis Company has been using absorption costing to assess the cost of the modules they manufacture. The use of a variable income statement may allow the firm to make better decision regarding pricing as it will allow for increased transparency and easier calculation of the number of units which will need to be solid to break even. The first stage is to convert the income statement into a contribution statement. Contribution Statements To prepare the contribution margin statement it is necessary to assess which costs are variable and which are fixed. The variable costs are those which are incurred as each unit is produced, varying with the production levels, while the fixed costs remain the same regardless of the level of production (Bragg, 2012). The foundation of contribution costing is to deduct the variable costs from the revenue that is realized for each unit sold, this is known as the contribution as it is this surplus of revenue after variable costs will contribute towards the fixed costs, and then provide for the profit (Drury, 2006; Watts, 2004). The absorption statement may be converted into a contrition statement as shown in table 1. Table SEQ Table * ARABIC 1; Contribution income statement for Lewis (at $300 per unit) Revenue 2,700,000 Direct materials 1,080,000 Direct labor 540,000 Variable overhead 360,000 Variable selling and admin 90,000 Total variable costs 2,070,000 Total contribution

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