A Revised Income Statement, The Contribution Margin Approach Essay

A Revised Income Statement, The Contribution Margin Approach

Alford Lawn Mowers Corporation based in California manufacture’s lawn mowers. Its factory can manufacture a maximum of 6,000 units a year or an average of 500 units per month . The following inputs and definition were provided by its accountant in determining the company’s breakeven level output:

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Selling price per unit:   $150

Variable cost per unit:  $50

Total fixed cost per month:  $20,000

The Unit Contribution Margin is the difference between the company’s product selling unit price and its unit variable cost or expense (www.dwmbeancounter.com). It is the amount available to cover fixed expenses and whatever remains will go towards profits. If the contribution margin is not sufficient to cover the fixed expenses, then a loss is noted for the period covered (www.accountingformanagement.com).

Assuming that Alford Lawn Mower’s Corp. has been able to sell only one (1) unit during the month, its contribution margin income statement is shown below as:

Alford Lawn Mowers Corp.
Contribution Margin Income Statement
For the Month of________

                                                                                                 Total               Per Unit

Sales (1 Unit only)                                                                    $150                  $150

Less Variable Expenses                                                                 50                     50

                                                                                                 ———-              ———

Contribution Margin                                                                      100                  100

Less Fixed Expenses                                                                 20,000               =====

                                                                                                  ======

Net Operating Loss                                                                 $(19,900)

Whenever the company sells an additional unit, $100 more in contribution can help cover the fixed expenses of the company in a month time. A second unit sold then can increase the contribution margin by $100 (total of $200); the company’s loss will now total to $19,800, a decrease by $200.

To at least break even or either a profit or loss for the company, but to cover only its expenses or costs, it has to sell $20,000 worth of product units. Since each unit sold contributes $100 in the contribution margin, the company has to sell 200 units to reach break even point or where the fixed expenses can be covered or zeroed out for the defined period. The contribution margin income statement will now appear as:

Alford Lawn Mowers Corp.
Contribution Margin Income Statement
For the Month of________

                                                                                                 Total             Per Unit

Sales (200 Units)                                                                    $30000              $150

Less Variable Expenses                                                            10000                  50

                                                                                                 ———-            ———

Contribution Margin                                                                 20,000                100

Less Fixed Expenses                                                                20,000              =====

                                                                                                  ======

Net Operating Profit                                                                    $ 0

                                                                                    ======

References

“Contribution Margin Method”. Retrieved July 29, 2009.  http://www.dwmbeancounter.com/breakeven.html

“Definition and Explanation of Contribution Margin”. Retrieved July 29, 2009

            http://www.accountingformanagement.com/cost_volume_profit_analysis.htm