Question

Accounting records for The Ralston Company show the following for the most recent fiscal year:

Units produced and sold 59,500
Total revenues and costs
Sales revenue $ 369,600
Direct materials costs 95,200
Direct labor costs 47,600
Variable manufacturing overhead 23,800
Fixed manufacturing overhead 61,600
Variable marketing and administrative costs 19,500
Fixed marketing and administrative costs 46,700
Required:

a. Prepare a gross margin income statement.

b. Prepare a contribution margin income statement.

Answer 1

The Gross Margin Income Statement shows an operating income of $94,700 after deducting cost of goods sold, fixed manufacturing, and fixed marketing and administrative costs from sales revenue. The Contribution Margin Income Statement reflects an operating income of $75,200 when variable costs are subtracted from sales revenue and then fixed costs are deducted.

Step-by-step explanation:

Gross Margin Income Statement Preparation

Here's how we would prepare a gross margin income statement for The Ralston Company:

• Sales Revenue: $369,600
• - Cost of Goods Sold (Direct Materials + Direct Labor + Variable Manufacturing Overhead): $95,200 + $47,600 + $23,800 = $166,600
• = Gross Margin: $369,600 - $166,600 = $203,000
• - Fixed Manufacturing Overhead: $61,600
• - Fixed Marketing and Administrative Costs: $46,700
• = Operating Income: $203,000 - $61,600 - $46,700 = $94,700

Contribution Margin Income Statement Preparation

Next, let's prepare the contribution margin income statement:

• Sales Revenue: $369,600
• - Variable Costs (Direct Materials + Direct Labor + Variable Manufacturing Overhead + Variable Marketing and Administrative Costs): $95,200 + $47,600 + $23,800 + $19,500 = $186,100
• = Contribution Margin: $369,600 - $186,100 = $183,500
• - Fixed Costs (Fixed Manufacturing Overhead + Fixed Marketing and Administrative Costs): $61,600 + $46,700 = $108,300
• = Operating Income: $183,500 - $108,300 = $75,200

Answer 2

The Gross Margin Income Statement shows a Net Income of $75,200 after accounting for all costs from the Sales Revenue, while the Contribution Margin Income Statement also results in the same Net Income of $75,200 after separating variable and fixed costs from Sales Revenue.

Step-by-step explanation:

Gross Margin Income Statement

Sales Revenue: $369,600
Less: Direct Materials Costs: $95,200
Less: Direct Labor Costs: $47,600
Less: Variable Manufacturing Overhead: $23,800
Less: Fixed Manufacturing Overhead: $61,600
Gross Margin: $141,400 (Sales Revenue - Total Manufacturing Costs)
Less: Variable Marketing and Administrative Costs: $19,500
Less: Fixed Marketing and Administrative Costs: $46,700
Net Income: $75,200 (Gross Margin - Total Marketing and Administrative Costs)

Contribution Margin Income Statement

Sales Revenue: $369,600
Less: Variable Costs (Direct Materials + Direct Labor + Variable Manufacturing Overhead + Variable Marketing and Administrative Costs): $186,100
Contribution Margin: $183,500 (Sales Revenue - Total Variable Costs)
Less: Fixed Costs (Fixed Manufacturing Overhead + Fixed Marketing and Administrative Costs): $108,300
Net Income: $75,200 (Contribution Margin - Total Fixed Costs)