How to Include the Contribution Margin
A contribution margin is the difference between a company’s sales and its variable expenses, which are expenses that change with the amount of sales. The contribution margin measures how much money is available to pay for fixed costs and to contribute to profit. Fixed costs remain the same regardless of the amount of sales. A higher contribution margin potentially leads to higher profit. You can include your contribution margin on your contribution margin income statement, which is a financial tool used to analyze sales and expenses.
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Instructions
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Determine from your records the amount of sales revenue you generated during an accounting period. For example, assume you generated $20,000 in sales.
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Identify in your records the amount of variable expenses you incurred during the period. In this example, assume you incurred $5,000 in variable expenses.
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Subtract variable expenses from sales to calculate the contribution margin. In this example, subtract $5,000 in variable expenses from $20,000 in sales to get a $15,000 contribution margin. This means you have $15,000 to spend on fixed expenses. If your fixed expenses are less than $15,000, the remainder of your contribution margin is profit.
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Divide the contribution margin by the number of units sold to determine the contribution margin per unit. In this example, if you sold 1,500 units during the period, divide $15,000 by 1,500 to get a contribution margin of $10 per unit. This means that once your contribution margin covers your fixed costs, each additional unit you sell adds $10 to your profit.
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Write “Contribution margin” in the first column on the line below variable expenses on your contribution margin income statement. Write the amount of the contribution margin in the second column on the same line, and write the contribution margin per unit in the third column on the same line. Continuing with the example, write “Contribution margin” in the first column, “$15,000” in the second column and “$10” in the third column.
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