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Eastman Kodak Company produces and sells cameras, film, and other imaging products
Eastman Kodak Company produces and sells cameras, film, and other imaging products. A condensed 2000 income statement follows (in millions):
Sales $13,994
Cost of goods sold 8,019
Gross Margin 5,975
Other operating expenses 3,761
Operating income $2,214
Assume that $1,800 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, $3,000 million of the other operating expenses is fixed.
Please complete the following:
1. Compute the total contribution margin for 2000 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 2001 and that the cost behavior was expected to continue in 2001 as it did in 2000. Compute the predicted operating income for 2001. By what percentage did this predicted 2001 operating income exceed the 2000 operating income?
3. What assumptions were necessary to compute the predicted 2001 operating income in requirement 2?
Expert Solution
Please see the attached file for parts 1 and 2 of this problem.
Part 3:
Note: (1) Sales in 2001 increased by 10%. The cost of goods sold and other variable operating expenses will increase
in direct proportion to the sales volume.
(2) Fixed costs tend to remain the same in both of the years as they are not affected by change in the volume as long as
capacity does not change. It is a period cost.
(3) Percentage of the contribution margin is the same in 2000 and 2001 as sales and cost (Contribution Margin Ratio) is the same. The Contribution margin Ratio does not change as long as there is no change in selling price or variable cost.
4) Operating income in 2001 records increase by 3.12% as the fixed cost is not changing in 2001.
5) The gross margin computed in traditional income statement and in contribution margin approach differs as fixed cost is
separated from total cost in the marginal costing technique.
6) It is assumed that fixed cost does not change in 2001 and variable cost will change in direct proportion to output and sales.
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