Question

Last month, Pioneer Company sold its product for $50 per unit. Fixed production costs were $20,000, and variable production costs amounted to $8.00 per unit. Fixed selling and administrative costs totaled $13,000, and variable selling and administrative costs amount to $3.00 per unit. Pioneer produced and sold 4,000 units last month.

Required:

(1) Prepare a traditional income statement for Pioneer Industries.
(2) Prepare a contribution margin income statement for Pioneer Industries.
(3) Why do companies use the contribution margin income statement format?

Answer 1

Traditional format Income Statement Sales $ 200,000 (4,000 units * $ 50) Less: Operating expenses Fixed production costs Variable production costs Fixed selling and administrative costs Variable selling and administrative costs Total Operating expenses Net Income $ $ $ $ 20,000 32,000 13,000 12,000 (4,000 units * $ 8) (62 pianos * $59) (4,000 units * $3) $ $ 77,000 123,000 $ 200,000 (4,000 units * $ 50) (4,000 units * $8) (4,000 units * $3) Contribution format Income Statement Sales Less: Variable expenses Variable production costs $ 32,000 Variable selling and administrative costs $ 12,000 Total variable expense Contribution Margin Less: Fixed expenses Fixed production costs $ 20,000 Fixed selling and administrative costs $ 13,000 Total Fixed expenses Net Income $ $ 44,000 156,000 $ $ 33,000 123,000 Companies use contribution margin income statement as it separates variable costs and fixed costs and which helps in analysis.