Question

Place the following line items in order to construct a contribution format income statement.

1. sales
2. variable expenses
3. contribution margin
4. fixed expenses
5. net operating income

Answer 1

The correct order for constructing a contribution format income statement is: Sales, Variable Expenses, Contribution Margin, Fixed Expenses, Net Operating Income. This format highlights cost behavior, aiding in management decisions.

Step-by-step explanation:

To construct a contribution format income statement, you need to follow a specific order that aligns with how costs and revenue are accounted for in this financial statement. Here is the correct sequence:

1. Sales
2. Variable Expenses
3. Contribution Margin (Sales - Variable Expenses)
4. Fixed Expenses
5. Net Operating Income (Contribution Margin - Fixed Expenses)

This format emphasizes the cost behavior and provides useful information for management decision-making, particularly in analyzing the impact of changes in sales volume on profitability.