Examples
Here's an example of a contribution format income statement:
| Sales | $ 462,452 |
| Less Variable Costs: | |
|
$ 230,934 $ 58,852 $ 13,984 |
| Total Variable Costs | $ 303,770 |
| Contribution Margin (34%) | $ 158,682 |
| Less Fixed Costs: | |
|
$ 1,850 $ 13,250 $ 5,400 $ 8,200 $ 9,600 $ 17,801 $ 40,000 |
| Total Fixed Costs | $ 96,101 |
| Net Operating Income | $ 62,581 |
The Beta Company's contribution margin for the year was 34 percent. This means that, for every dollar of sales, after the costs that were directly related to the sales were subtracted, 34 cents remained to contribute toward paying for the indirect (fixed) costs and later for profit.
Contribution format income statements can be drawn up with data from more than one year's income statements, when a person is interested in tracking contribution margins over time. Perhaps even more usefully, they can be drawn up for each product line or service. Here's an example, showing a breakdown of Beta's three main product lines:
| Line A | Line B | Line C | |
|---|---|---|---|
| Sales | $120,400 | $202,050 | $140,002 |
| Less Variable Costs: | |||
| Cost of Goods Sold | $70,030 | $100,900 | $60,004 |
| Sales Commissions | $18,802 | $40,050 | $0 |
| Delivery Charges | $ 900 | $ 8,084 | $ 5,000 |
| Total Variable Costs | $ 89,732 | $ 149,034 | $ 65,004 |
| Contribution Margin | $ 30,668 | $ 53,016 | $ 74,998 |
| percentage | 25% | 26% | 54% |
Although this shows only the top half of the contribution format income statement, it's immediately apparent that Product Line C is Beta's most profitable one, even though Beta gets more sales revenue from Line B(which is also an example of what is called Partial Contribution Margin - an income statement that references only variable costs). It appears that Beta would do well by emphasizing Line C in its product mix. Moreover, the statement indicates that perhaps prices for line A and line B products are too low. This is information that can't be gleaned from the regular income statements that an accountant routinely draws up each period.
Read more about this topic: Contribution Margin
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