Student’s Name
Institution Affiliation
 
 
 
 
 
 
Memo
The use of variable costs are essential in determing the contribution margin of each commodity. Income statement made in this wat clearly separate variable costs from fixed costs and enable for an easier interpretation of the results. Importantly, the contribution margin enables a financial manager to determine the value of each commodity to the company. In the preparation of the variable income statements, the net variable costs are substracted from the revenues to get the contribution margin of each commodity. Finally, the net fixed costs are substracted from the sum of the contribution margins to get the net incomes. The contribution margin shows how much the business earns by producing an extra commodity of each products.
Various Income statements were derived as shown below:
Income Statement One
Interpretation
For the business to be profitable, it must produce commodities whose total contribution margin is at least equal to the sum of all fixed costs.
The fixed costs are [5000+2000+1000+3000=11,000]
Products                                                          A              B                 C             D                E
Quantities Sold                                               2,000       1,000           500           400            400
Contribution Margin for all products         $4,000.00   $8,500.00  $6,750.00   $9,400.00 $7,400.00
Contribution Margin for each product              2              8.5           13.5               23.5         18.5
The contribution margin for each product is derived by dividing the contribution margin of all the products with the quantities sold.
Where there are limited resources, the business should first satisfy the demand for products that have the highest contributions followed by those with less contributions. In this case, the first product to be produced should be D, then E, then C, then B, and finally A.
The break even price is used to calculate the break even quantity. The break even quantity is used to determine the amount of commodities that a company must produce for it to be profitable. The break even quantity is derived by dividing the fixed costs with the contribution margin.
The Break Even Quantity (BEQ)
Total fixed costs         11,000
Product           BEQ= Total fixed cost/ contribution margin per unit of each product
A         5500
B         1295
C         815
D         469
E          595
Income Statement Two
Interpretation                                                           
Assume 90% of books are sold.
The fixed costs are [5000+2000+1000+3000=11,000
Products                                                A                B               C                 D           E
Quantities Sold                                     1215          4860        8100            16200      16200
Contribution Margin for all products  $5,400.00 $9,180.00 $12,150.00 $21,150.00  $16,650.00
Contribution Margin for each product   4.444       1.889           1.5               1.3056         1.0278
In the case of limited resources, the business should first satisfy the demand for products that have the highest contributions followed by those with the less. In this case, the first product should be A, then B, then C, then D, and finally E.
The Break Even Quantity (BEQ)
Total fixed costs         11,000
Product           BEQ= Total fixed cost/ contribution margin per unit of each product
A         2475
B         5824
C         7334
D         8426
E          10703
Income Statement Three
Interpretation
Assume Price is Increased by 50%
The fixed costs are [5000+2000+1000+3000=11,000]
Products                                              A                 B                C                D                E
Quantities Sold                                   2,000         1,000           500               400           400
Contribution Margin for Products  $8,000.00  $16,000.00  $13,000.00 $18,400.00              $15,400.00
Contribution Margin for each product            4          16            26                  46            38.5
 
In the case of limited resources, the business should first satisfy the demand for products that have the highest contributions followed by those with the less. In this case, the first product should be D, then E, then C, then B, and finally A.
The break even quantity is derived by dividing the fixed costs with the contribution margin.
The Break Even Quantity (BEQ)
Total fixed costs         11,000
Product           BEQ= Total fixed cost/ contribution margin per unit of each product
A         2750
B         688
C         424
D         240
E          286
Converting the Venture to Full Time Business
Interpretations
Assumption
1.When the owner dedicates his entire time and energy, he will be able to have a turnover of three times his purchases.
2.The owner will also be able to sell his commodities in prime markets at 20% more than the current prices.
For the business to be profitable, it must produce product whose total contribution margin is equivalent to the sum of all fixed costs.
The fixed costs are [5000+2000+1000+3000=11,000]
Products                                              A         B         C         D         E
Quantities Sold                                   9000    3600    3000    3000    3000
Contribution Margin for all Porducts 25200  41400  55500  97500  79500
Contribution Margin for each product            2.8       11.5     18.5     32.5     26.5
In the case of limited resources, the business should first satisfy the demand for products that have the highest contributions followed by those with the less. In this case, the first product should be D, then E, then C, then B, and finally A.
The Break Even Quantity
Total fixed costs         11,000
Product           BEQ= Total fixed cost/ contribution margin per unit of each product
A         3929
B         957
C         595
D         339
E          416
Conclusion
Ultimately, the business must decide to always produce commodities that have the least costs and highest profit margins. By using the contribution ratios, a business can always achieve this goal by always selecting products that have the highes contribution margin. Therefore, the use of a variable income statement is important, especially in cost management.
 
 
 
 
Memo
The success of a business is largely dependent on its ability to make prudent financial decisions such as how to manage its costs and where to concentrates its investments. Importantly, this information enables the management to know when it should pull out of a loss-making venture or when it should invest more capital. In addition, it also gives the management information on how it should reward its human resource. In order for a business to make prudent financial decisions, it should have proper financial statements. The most common financial statements are the income statements, the cash flow statement, and the balance sheet.
Types of Financial Statements
The cash flow statement is an important financial document that shows how the changes in a company’s income statement and balance sheet affect its cash and cash equivalents. Through the use of this statement, the business management avoids making reckless decisions that would make the company have liquidity problems. The balance sheet is an important financial statement that shows the sum of the company’s asset on one part, and those of the company’s liabilities and capital on the other. Through this statement, a business is always able to assess its net value (Braun & Tietz, 2014). Finally, the income statement refers to the financial document that shows the amount of net profits or losses that a business made in a given fiscal period.
Reasons for Different Types of Financial Statements
Although the main objective of an income statement is to show how much profit or loss that a business made, companies may at times prepare different types of these document with an aim of disclosing important and unique financial matters for their operations. Generally, the format of an income statement is always given by the sum of the total revenues and gains minus the sum of expenses and losses. The main reason for preparing different types of income statements are as follows:

  1. To make additional disclosures of the business overall performance
  2. To identify the contribution margin of each commodity or department
  3. To create an easy understanding of the company’s operations (Horngren, Sundem, & Stratton, 2010).

Accounting systems such as the multiple-step income statement, which has an analytical disclosure of the business operations, reveals a lot of information concerning the company’s activities. On the hand, the contribution margin income statement enables the business to identify how much it earns from each department or commodity. A condensed income statement aggregates all the business expenses and incomes and results in easier calculations. As a result, it is always easy to understand information on this statement (Horngren, Sundem, & Stratton, 2010).
Uses of Variable Costs
While variable costs are important when preparing variable financial statements, their main value is on making financial decisions such as controlling costs, planning on profits, decision making, and pricing decisions. As a tool of controlling costs, this method estimates the cost needed to produce each commodity. It also enables the management to have an accurate estimate of the resources they need to produce a specific volume of the commodity. Importantly, variable costs enable the management to form an appropriate decision on the most profitable product mix. Through the calculation of the contribution margin, the management is able to decide on the commoditis that it should prioritize on its production chain. Basically, a company’s management decides to produce the greatest volume of quantity on products that have the highest returns. Accordingly, those that have the smallest contributions are the least produced (Garrison, Noreen, & Brewer, 2011). Further, through the pricing decision, a business is able to form a product mix of commodities at the most profit-maximizing levels. Finally, this technique enables a business to plan its profits by determining the breakeven quantity that it must sell to make a profit.
Conclusion
To sum up, the ability of the company’s management, and especially to the finance manager, to form and interpret financial statements is important in making prudent financial decisions. Specifically, financial statements disclose products and departments that are unprofitable and those that bring the greatest contribution to the company. As a result, the management is able to know business activities that it should promote and those that it should terminate. In light of this, all organizations should prepare proper financial statements and make an in-depth analysis of their performance so as to remain competitive.
 
References
Braun, K. & Tietz, W. (2014). Managerial accounting (4th Ed.). New York, NY: Pearson Publishers.
Horngren, C., Sundem, G., & Stratton, W. (2010). Introduction to management accounting (15th Ed.). Upper Saddle River, NJ: Prentice Hall.
Garrison, R., Noreen, E., & Brewer, P. (2011). Managerial accounting (14th Ed.). New York, NY: Mc Graw-Hill.