Traditional Income Statement vs Contribution Margin: What’s the Difference?

On the other hand, the net profit per unit may increase/decrease non-linearly with the number of units sold as it includes the fixed costs. It is important to assess the contribution margin for break-even or target income analysis. The target number of units that need to be sold in order for the business to break even is determined by dividing the fixed costs by the contribution margin per unit. In the past year, he sold $200,000 worth of textbook sets that had a total variable cost of $80,000. Thus, Dobson Books Company suffered a loss of $30,000 during the previous year.

For example, assume that the students are going to lease vans from their university’s motor pool to drive to their conference. If they send one to eight participants, the fixed cost for the van would be $200. If they send nine to sixteen students, the fixed cost would be $400 because they will need two vans. We would consider the relevant range to be https://www.bookstime.com/articles/what-are-notes-receivable between one and eight passengers, and the fixed cost in this range would be $200. If they exceed the initial relevant range, the fixed costs would increase to $400 for nine to sixteen passengers. As the formula above shows, calculating the break-even point requires the contribution margin, which is provided by a contribution margin income statement.

Use of Contribution Formula

And to understand each of the steps, let’s consider the above-mentioned Dobson example. As a business owner, you need to understand certain fundamental financial ratios to manage your business efficiently. These core financial ratios include accounts receivable turnover ratio, debts to assets ratio, gross margin ratio, etc. It cannot be zero because it has fixed expenses that are incurred whether or not a business makes a sale. Because expenses are classified as variable or fixed, it is much easier to determine whether a product, service or even segment is profitable or not.

And the personal tax rate is applied to non-dividends income so it is not relevant here. It is not very difficult to understand how to adjust the income format of contribution margin income statement format the contribution margin. Here, we are calculating the CM on a per-unit basis, but the same values would be obtained if we had used the total figures instead.

The Difference Between a Contribution Margin Income Statement and a Normal Income Statement

For example, if your product revenue was $500,000 and total variable expenses were $250,000, your contribution margin would be $250,000 ÷ $500,000, or 50%. Variable costs (or expenses) are any costs that do not remain consistent. These could include energy, wages (for labor related to production) or any other cost that raise or lower with the output levels of your business.

The contribution margin income statement is a useful tool when analyzing the results of a previous period. This statement tells you whether your efforts for the period have been profitable or not. The resulting value is sometimes referred to as operating income or net income.