Question

*Minimum of 500 words*

Your boss read a recent magazine article about income statements, but he was unclear about the differences between a traditional income statement and a contribution margin income statement. Explain the difference by: a) presenting a sample format for each statement, b) describing the focus of each statement, and c) discussing how and by whom each statement is used.

Answer 1

A sample traditional income statement looks like: xxx Revenue (-) cost of goods Gross profit - SG&A expenses - Operating profit (-) Depreciation EBITDA (-) Interest expenses PBT - Income tar | Net income XXX A contribution margin statements lodes like (xxx) I Sales (-) Direct expenses. - Direct material (-) Direct labour - Sales commission expenses (-) Packing & Shipping cart (xxx) - (-) Contribution margin fined cost Operating of Office rent exp Admin eap (salary Advertising expenie Operating income xxx Page No.

6 As can be seen from the difference in format, the traditional income statement is focused in knowing the various types of margins of the firm, whereas a contribution margin is focus on knowing the profitability of an individual project after accounting for all the variable costs that are been in association with it. C A traditional income statement is used by investors & market participants and other stake holders to assess the financial performance of a company, whereas a contribution margin statement is used by managers within an organization to understand the true cost of a product & Then make the pricing decision accordingly.