The contribution margin income statement is used in economics for analysis of the effectiveness of all the efforts taken in order to achieve higher revenue during a certain period. It is also called as income statement and its purpose is to calculate the contribution margin of the company, which helps to define if the changes occurred in the company bring positive results in terms of profits.
Explanation:
The contribution margin of the company is derived by subtracting the variable expenses incurred by the company for the period from the total sales of the company. In order to get the final figure that shows the operating income of the company, it is necessary to further subtract the fixed expenses from the contribution margin.
Thus, the contribution margin income statement allows users to easily judge the impact of a change in the financial activities of an organization. For example, if the total sales of a company for the period were $500,000 and the variable expenses were $300,000, the contribution margin will be $200,000. The example of the contribution margin income statement format can be found in figure 1 presented below.
The situation when the sales are equal to the costs of the company is called the break-even point. If an organization’s revenue goes beyond the break-even point, then the activity of the company is profitable. If an organization’s contribution margin is below the break-even point, the company can be considered as unprofitable. There are two ways how the break-even point is usually calculated, namely, in dollars and units. If it is counted in units, then it is necessary to follow the next formula: Fixed costs/(revenue per unit-variable cost per unit). The formula for counting break-even point in dollars is: fixed costs/contribution margin.