Prepare an Income Statement using the Contribution Approach for The Tailgate Shop

What is the financial performance of The Tailgate Shop's Trailer Hitch Department in the first quarter of the year based on the income statement provided?

The Trailer Hitch Department incurred a net loss of $230,500 in the first quarter of the year.

Introduction to Contribution Approach:

The contribution approach is a management accounting technique that separates costs into variable and fixed components to analyze the profitability of individual products or departments. By categorizing costs in this manner, businesses can better understand the impact of changes in sales volume on their financial performance.

Calculating Income Statement using the Contribution Approach:

In preparing the income statement for The Tailgate Shop's Trailer Hitch Department using the contribution approach, we need to consider the following components:
Sales: $550,000
Variable Costs:
- Cost of goods sold: $250,000 - Variable selling expenses: $20 per hitch (total hitches sold = $220 each) - Variable administrative expenses: 30% of total administrative expenses
Contribution Margin: Sales - Variable Costs
Fixed Costs:
- Remaining selling expenses - Fixed administrative expenses
Net Income: Contribution Margin - Fixed Costs

Analysis of The Tailgate Shop's Trailer Hitch Department:

Our calculation using the contribution approach revealed that the department incurred a net loss of $230,500 in the first quarter of the year. This negative result indicates that the total variable expenses exceeded the gross margin, resulting in a loss for the department. The higher variable expenses compared to the contribution generated from sales highlight potential cost structure issues that need to be addressed by management. By identifying and analyzing these cost components, the company can make informed decisions to improve profitability and operational efficiency. In conclusion, the contribution approach provides valuable insights into the financial performance of a department or product line by breaking down costs into variable and fixed elements. This analysis enables businesses to understand the contribution margin and make strategic decisions to enhance overall profitability. For further information on managing expenses effectively, you can refer to additional resources on financial management practices and strategies.
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