The Cornerstone Corporation pr
The Cornerstone Corporation produces and sells a singleproduct. The following data refers to the year justcompleted:
|
List of Account Titles |
||
|
Beginning inventory |
0 |
|
|
Units produced |
9,000 |
|
|
Units sold |
7,000 |
|
|
Selling price per unit |
$ |
47 |
|
Selling and administrative expenses: |
||
|
Variable Cost per unit |
$ |
4 |
|
Fixed Cost per year |
$ |
58,000 |
|
Manufacturing costs: |
||
|
Direct materials cost per unit |
$ |
10 |
|
Direct labor cost per unit |
$ |
6 |
|
Variable manufacturing overhead cost perunit |
$ |
5 |
|
Fixed manufacturing overhead per year |
$ |
90,000 |
a. If the managers use the variable costing approach toprepare an income statement, what is the dollar amount for thecontribution margin account that would be reported on this type ofincome statement? Show all detailed supportingcalculations that were used to determine the finalanswer.
b. If the managers use the absorption (traditionalfinancial) costing approach to prepare an income statement, what isthe dollar amount for the gross margin account that would bereported on this type of income statement? Showall detailed supporting calculations that were used to determinethe final answer.
c. Provide a concept definition for the termscontribution margin and gross margin, and then explain why managersmight prefer to use the contribution margin analysis approach toenable more effective decision making, rather than focusing on agross margin that is part of the absorption costingapproach.
Answer:
| a. Variable CostingApproach | |||
| Particulars | Units | Per unit | Total |
| Sales (A) | 7000 | $47 | $3,29,000 |
| Variable Expenses (B) | |||
| Selling and Admin Expenses | 7000 | $4 | $28,000 |
| Manufacturing costs | 7000 | $21 | $1,47,000 |
| ($10 + $6+ $5) | $1,75,000 | ||
| Contribution Margin C = (A-B) | $1,54,000 | ||
| Fixed Expenses (D ) | |||
| Selling and Admin Expenses | $58,000 | ||
| Manufacturing costs | $90,000 | ||
| $1,48,000 | |||
| Net Operating Income (C-D) | $6,000 | ||
| b. Absorption Costing Approach | |||
| Particulars | Units | Per unit | Total |
| Sales (A) | 7000 | $47 | $3,29,000 |
| Cost of Goods Sold (B) | |||
| Variable Manufacturing costs | 7000 | $21 | $1,47,000 |
| ($10 + $6+ $5) | |||
| Fixed Manufacturing Overhead | 7000 | $10 | $70,000 |
| ($90,000/9000) | |||
| $2,17,000 | |||
| Gross Margin C = (A-B) | $1,12,000 | ||
| Selling and Admin Expenses (D) | |||
| Variable Cost | 7000 | $4 | $28,000 |
| Fixed Cost | $58,000 | ||
| $86,000 | |||
| Net Operating Income (C-D) | $26,000 |
C.
Gross profit margin measures the revenue that remains aftersubtracting costs directly associated with manufacturing. It doesnot take into consideration sales or administration expenses.
Contribution margin is a measure of the profitability of variousindividual products after subtracting variable costs from revenue.It does not take into consideration fixed costs.
The contribution margin is used to evaluate the profitability ofan item out of a product portfolio and thus leads to more accurateand effective decision making.
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