2- 57 Gross Margin and Contribution Margin Eastman Kodak Company is a provider o

Question

2- 57 Gross Margin and Contribution Margin Eastman Kodak Company is a provider of imaging technology products and services to the photo-graphic, graphic communications, and health- care markets. A condensed 2008 income statement follows ( in millions):

                Sales $ 9,416

                Cost of goods sold 7,247

                Gross margin 2,169

                Other operating expenses 2,896

                Loss from continuing operations $ ( 727)

Assume that $ 1,400 million of the cost of goods sold is a fixed cost representing depreciation and other production costs that do not change with the volume of production. In addition, $ 2,000 million of the other operating expenses is fixed.

1. Compute the total contribution margin for 2008 and the contribution margin percentage. Explain why the contribution margin differs from the gross margin.

2. Suppose that sales for Eastman Kodak were predicted to increase by 10% in 2009 and that the cost behavior was expected to continue in 2009 as it did in 2008. Compute the predicted operating income

(loss) for 2009.

3. What assumptions were necessary to compute the predicted 2009 operating income in requirement 2?

Explanation / Answer

Hi,

Please find the answer as follows:

Part 1:

Contribution Margin is different from gross margin because gross margin is arrived at after deducting the total value of goods sold which includes both fixed and variable production expenses, while contribution margin is calculated after deducting variable expenses (both production and operating)

Part 2:

Part 3:

It was assumed that the variable costs and contribution have changed in the same proportion (to sales) as in the previous year and there has been no change in the fixed costs.

Thanks.

Sales 9416 Less Variable COGS (7247-1400) 5847 Variable Operating Expenses (2896 - 2000) 896 Contribution Margin 2673

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