Comparison of Income Statement Formats $12,000 Traditional Approach (costs organized by function) Sales Cost of goods sold Gross margin Selling and administrative expenses: Selling. $3,100 Administrative. 1,900 Net operating income. $12,000 6,000 6,000 Contribution Approach (costs organized by behavior) Sales Variable expenses: Variable production $2.000 Variable selling 600 Variable administrative 400 Contribution margin Fixed expenses: Fixed production 4,000 Fixed selling 2,500 Fixed administrative 1,500 Net operating income 5,000 $ 1,000 3,000 9,000 8,000 $1,000 External Required by GAAP for financial reporting Internal Used as a TOOL for planning & decision making Expense Categories Expense Categories Sales Less: VC CM Less: FC Contribution Margin Income Statement (assuming 5,000 Units) Total Per Unit Percentage $ 100,000 60,000 40,000 10,000 $ 30,000 NI Per Unit Computations: Percentage Computations: Comparison of Income Statement Formats $12,000 Traditional Approach (costs organized by function) Sales Cost of goods sold Gross margin Selling and administrative expenses: Selling. $3,100 Administrative. 1,900 Net operating income. $12,000 6,000 6,000 Contribution Approach (costs organized by behavior) Sales Variable expenses: Variable production $2.000 Variable selling 600 Variable administrative 400 Contribution margin Fixed expenses: Fixed production 4,000 Fixed selling 2,500 Fixed administrative 1,500 Net operating income 5,000 $ 1,000 3,000 9,000 8,000 $1,000 External Required by GAAP for financial reporting Internal Used as a TOOL for planning & decision making Expense Categories Expense Categories Sales Less: VC CM Less: FC Contribution Margin Income Statement (assuming 5,000 Units) Total Per Unit Percentage $ 100,000 60,000 40,000 10,000 $ 30,000 NI Per Unit Computations: Percentage Computations