Question

Jay corporation has decided to prepare contribution income statements for internal planning. What is the purpose of preparing contribution income statements?

1) To calculate the net income of the company
2) To determine the contribution margin of each product
3) To analyze the fixed and variable costs
4) To evaluate the profitability of different business segments

Answer 1

The contribution income statement allows Jay Corporation to analyze fixed and variable costs, determine each product's contribution margin, and evaluate the profitability of business segments.

Step-by-step explanation:

The purpose of preparing contribution income statements for Jay corporation is to analyze the fixed and variable costs, and to determine the contribution margin of each product. This type of income statement is a management tool that separates variable costs from fixed costs, providing a clear view of the contribution margin, which is the revenue remaining after variable costs are subtracted. By understanding the contribution margin, management can make informed decisions regarding pricing, cost control, and profit planning. Additionally, this format of income statement can help in evaluating the profitability of different business segments by showing which segments are contributing more to covering fixed costs and generating profit.