Contribution Margin Income Statement

What is the Contribution Margin Income Statement?

Contribution margin income statements refer to the statement which shows the amount of contribution arrived after deducting all the expenses that are variable in nature from the total revenue amount and further fixed expenses are deducted from the contribution to get the net profit/loss of the business entity.

It is a special format of the income statement that segregates the variable and fixed expenses involved in running a business. It shows the revenue generated after deducting all variable and fixed expenses separately. In simple words, this format expresses the revenue generated after paying all the variable costs.

Contribution Margin Income Statement Format:

contribution margin income statement eg

Every dollar of revenue generated goes into either of Contribution Margin or Variable Costs. What’s left in contribution margin goes in covering Fixed CostsFixed CostsFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more and remaining into the Net Profit / Loss.

Contribution Margin Income Statement

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For eg:
Source: Contribution Margin Income Statement (wallstreetmojo.com)

Unlike a traditional income statement, the expenses are bifurcated based on how the cost behaves. Variable cost includes direct materialDirect MaterialDirect materials are raw materials that are directly used in the manufacturing process of a company's goods and/or services and are an essential component of the finished goods manufactured.read more, direct labor, variable overheads, and fixed overheads. It does not matter if your expenses are production expenses or selling and administrative expenses. If they are variable, they must be included in variable costs. The same thing goes with fixed expenses; if they are fixed, they must be included in fixed costs.

The contribution margin and the variable cost can be expressed in percentage of the Revenue. These are called the contribution margin ratio and variable cost ratio, respectively.

Examples of Contribution Margin Income Statement

Example #1

‘My Cake Shop’ is a cake and pastry business that you run. With the rising demand in customers asking for workshops for baking their cakes, you started weekend workshops for the same. The revenue generated for the month was $7,500, which included direct sales of $6,000, and income from conducting Weekend Cake Workshops was $1,500. Wages paid were $2,000, and the expense incurred in procuring materials summed up to a total of $1,500. Rent of $1,000 was paid, and the insurance premium payment of $200 was also made. The contribution margin income statement would look like this:

contribution margin income statement eg2

Example #2

Last month, Vienna Inc. sold its product for $2,000 per unit. The fixed production costs were $3,000, and fixed selling and administrative costs were $50,000. Variable production costs were $1,000 per unit, and variable selling and administrative costs were $500 per unit. Vienna Inc. sold 500 units for the previous month.

Prepare a contribution margin income statement.

eg3

Calculation:

Contribution Margin Ratio

Contribution Margin Ratio = (250,000 / 1,000,000) x 100

Example 5

Contribution Margin Ratio = 25%

Variable Cost Margin Ratio

Variable Cost Margin Ratio = (750,000 / 1,000,000) x 100

example 6

Variable Cost Margin Ratio = 75%

Contribution Margin Income Statement vs. Traditional Income Statement

  • It replaces gross margin.
  • Fixed expenses are cached lower after contribution margin.
  • Variable expenses are a part of calculating the contribution margin.

Advantages

Disadvantages / Limitations

Important Points

  • It depicts expenses based on its functional area.
  • It distinguishes between fixed and variable expenses.
  • The statement helps in decision making for the management.
  • With the help of the statement, we can conduct a break-even analysis.

Conclusion

The contribution margin income statement is a special format of the income statement that focuses on expenses that are bifurcated for better understanding. Looking at this statement, it can be easily understood as to which business activity is resulting in a revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more leak.

This article has been a guide to what is Contribution Margin Income Statement. Here we explain its format, examples, and their advantages and disadvantages. You may learn more about finance from the following articles –

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Comments

  1. Kavishe says

    Thanx

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