Question

In the following equations, based on the variable costing income statement, identify the items designated by X: a. Net Sales – X = Manufacturing Margin b. Manufacturing Margin – X = Contribution Margin c. Contribution Margin – X = Income from Operations a. b. c.

Answer 1

A = Total cost

B = Variable cost

C = Fixed cost

Explanation:

A - Manufacturing cost includes all the cost directly and/or indirectly involved in the production process. It includes the variable component and fixed component, which represent the total cost. Hence, to arrive at the manufacturing margin, the total cost is subtracted from the net sales. The results us the manufacturing margin.

B - Contribution margin only includes and ultimately works with the individual variable element of cost, unlike the manufacturing margin. Hence, to arrive at the contribution margin, the variable cost element is subtracted from the manufacturing margin.

C - To arrive at the income from operations, the fixed cost element is subtracted from the contribution margin. With this, our income from operations can be derived.