Question - In your monthly Chamber of Commerce meeting you heard that some of your peers running other businesses changed from a traditional income statement approach to a contribution margin approach. Your peers said this helps show the importance of volume levels to the businesses profitability.
You know that by using the contribution format income statement you can change what projected profits look like by changing your classification of fixed vs. variable type costs.
A memo is needed to your CFO which does the following:
1. Summarize what a contribution format income statement depicts, as compared to the traditional format.
2. Using the following company data, show how the two income statement formats would look side by side.
3. Explain why the contribution approach is more useful to project profits. As an example, show your calculations when using a projected sales increase of 20%.
4. Using the following data, show how expected profits would be different if there was a sales increase of 10% and she used variable COGS of 50% vs. 60%. As an offset, this implies an increase in fixed COGS of $1,000,000.
Company Data to use for Parts 2 and 4
Last year's sales: $10,000,000
Variable cost as a % of sales: 60%
Fixed costs of manufacturing: $2,000,000
Variable selling and administrative costs as % of sales: 10%
Fixed selling and administrative costs: $1,000,000
Reported profit: $0