Analysis and Decision-Making Case

Vince couldnt believe his ears. Two of his colleagues in the accounting department at Tangent Corp. were having a heated discussion about the companys financial performance for the first month of the new year. Mainly, each manager felt that one income statement subtotal overruled the other. Here is an excerpt of their discussion:

Manager 1: Our external stakeholders rely on our published financial statements. These statements present gross margin for a reason, because users can compare our performance to others in the industry and make investment and credit decisions based on that, among other things.

Manager 2: Yes, but internally we rely on cost behavior information to make day-to-day decisions, both operationally and strategically. Without contribution margin, we wouldnt know how much capacity we have for long-term fixed costs such as new equipment purchases and long-term executive salary contracts, just to name a couple.

Manager 1: But clearly our external users are our primary stakeholders. Without their investments in our business, we wouldnt have any decisions to make!

Manager 2: Wow, do you live in a cave? Have you not been attending our weekly management meetings? All we talk about is fixed cost this and variable cost that. If we dont truly understand our costs, we will be paralyzed from a decision-making standpoint.

Both managers threw their hands up in the air and walked away in opposite directions. Vince was stunned. He had heard banter like this before, but it had never turned into an argument.

Required:

Does each manager make good points, or are the arguments of one or both completely off-base? Identify three useful attributes of (1) the gross margin measure and (2) the contribution margin measure. In other words, who might use each of these measures, and for what purpose would they use it?