Income Statement Contribution Method Revenue Research Proposal

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This is the result of the decline in inventory levels. If the inventory levels had not changed, there would have been no difference between the net profit for the two methods.

If the company sold another 10,000 units, it would have a higher profit. This calculation was based on the contribution margin method. What occurs in this method is that the company sells more, but it does not produce more. Therefore, the variable operating and selling cost increases, but the variable production cost does not increase. The inventory is run down further than in the first example, increasing the spread between the profit in the two methods.

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I would recommend to management that the absorption method is used to calculate these costs. Because the costs are matched up more closely with sales, the resulting figures give management a better figure of the cost of the goods sold for the year. This reduces the impact that management can have on the results, which could under the contribution margin method be subject to managerial manipulation through manipulation of production….....

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