Contribution Approach to Pricing A company has a budget for 19_2; the absorption-costing approach follows (figures assumed):

Sales $100,000 100%

Factory cost of goods sold, including $20,000 fixed costs 60,000 60 Gross profit $ 40,000 40%

Operating expenses, including $20,000 fixed costs 30,000 30 Net income target $ 10,000 10%

Normal or target markup percentage:

$40,000 + $60,000 = 66.7% of absorption cost

- Recast the income statement in a contribution format. Indicate the normal or target markup percentage based on total variable costs.

_ Assume the same cost behavior patterns as above. Assume further that a customer offers $540 for some units that have a factory cost of goods manufactured of

$600 and total variable costs of $500. Should the offer be accepted? Explain.

_ Under what circumstances would you adopt a contribution approach to pricing as a part of your usual accounting system? That is, the system would routinely provide data using the contribution format. lop5