Jokkmok Industries



Jokkmok Industries

Conversion of Absorption income statement to a contribution margin income statement

The contribution margin income statement is prepared by deducting all variable expenditures from sales in order to determine the contribution margin. Then all the fixed expenses are deducted from the contribution margin in order to reach at the profit for a particular period of time. The overall expenses are arranged as per their nature throughout the income statement. The advantage of contribution margin is that is shows the amount that company has left to cover tits fixed expenses after subtracting all variable expenses. In the absence of sales, the contribution margin is deemed to be zero. The contrition margin has a directly proportional relationship with the increasing level of sales. The fixed cost remains constant throughout. The main difference between absorption and contribution margin income statement is that the fixed expenditures are showed in the lower part of income statement. All the variable expenses are shown in a separate group. The contribution margin replaces the gross margin in this kind of income statement (Khan, 2006). The contribution margin income statement for the quarter ending September 30 2013 of Jokkmok Industries is exhibited below:

Contribution margin Income statement for first quarter (25000 units)

Sales

$2,500,000

Variable costs

Less Selling & general expenses

1,800,000

Contribution Margin

700,000



Less Fixed -Selling &General

350,000

Net income

$350,000

COGS per unit

72

Selling and general expenses per unit

14

Price per unit

$100

The contribution margin income statement and absorption margin Income Statements for succeeding quarters are as follows, as required by the bullet no.2 of the computation requirements:

Contribution margin Income statement for second quarter (50000 units)

Sales

$5,000,000

Variable costs

COGS

3,600,000

Contribution margin

1,400,000

Selling & general expenses 350,000 Overheads

800,000

Net income

$250,000

Contribution margin Income statement for third quarter (25000 units)

Sales

$2,500,000

Variable costs

Less Selling & general expenses

1,800,000

Contribution Margin

700,000



Less Fixed -Selling &General

350,000

Net income

$350,000

Contribution margin Income statement for fourth quarter (25000 units)

Sales

$2,500,000

Variable costs

Less Selling & general ...