Variable and Fixed Costs

Herrestad Company

Introduction

The focus of this paper would be on Herrestad Company focusing on contribution margin income statement and compare net operating profit from a contribution margin income statement with net income from an absorption income statement. Beside this, Break-Even Analysis will also be conducted.

Discussion

a) Contribution Margin Income Statement

Contribution Margin determines operating leverage of the company. Contribution margin refers to marginal profit per unit of sales. Contribution is equal to sales minus variable cost (Sawyers, Jenkins, Jackson, 2012). Formula for Contribution Margin is as followed:

Total Contribution Margin = Total Sales - Total Variable Costs

Contribution Margin

Sales ...