Question

which of the following statements are true?

1. contribution margin and gross margin mean the same thing.
2. the contribution format income statement is used as an internal planning and decision-making tool. its emphasis on cost behavior aids cost-volume-profit analysis, management performance appraisals, and budgeting.
3. a contribution format income statement separates costs into fixed and variable categories, first deducting variable expenses from sales to obtain the contribution margin.

multiple choice

• all of the statements are true.
• only statement 1 is true.
• none of the statements are true.
• both statements 2 and 3 are true.

Explanation:

Analyze Statement 1

Contribution margin and gross margin are distinct concepts. Contribution margin is sales minus all variable expenses, whereas gross margin is sales minus cost of goods sold. Thus, Statement 1 is false.

Analyze Statement 2

The contribution format income statement is designed for internal management use. By organizing costs by behavior (variable vs. fixed), it facilitates cost-volume-profit (CVP) analysis, budgeting, and decision-making. Thus, Statement 2 is true.

Analyze Statement 3

The contribution format separates costs into variable and fixed categories. It subtracts variable expenses from sales to calculate the contribution margin, then deducts fixed expenses to find net operating income. Thus, Statement 3 is true.

Answer:

• All of the statements are true.
• Only statement 1 is true.
• None of the statements are true.
• Both statements 2 and 3 are true. (Correct answer)