A technical content writer and FP&A enthusiast, Abbie is passionate about building customer education that develops confidence and self-sufficiency.
Technical Content Writer, Cube Software
![Contribution margin income statements: a complete guide [2024]](https://www.cubesoftware.com/hubfs/contribution%20margin%20income%20statement%20%281%29.png)
The contribution margin income statement is how you report each product's contribution margin—a key part of smart operating expense planning . It separates fixed and variable costs to show which products or services contribute most to generating profit.
But how do you build one, and how is the contribution margin different from earnings before interest and taxes (EBIT)?
If you’re serious about safeguarding your business’s finances , you need to get into the granular details of your profitability—and that means producing quality contribution margin income statements. A contribution margin income statement is a document that tallies all of a company’s products and varying contribution margins together, helping leaders understand whether the company is profitable. It’s a useful tool for making decisions on pricing, production, and anything else that could improve profitability . For instance, Nike has hundreds of different shoe designs, all with different contribution margins. Putting these into a traditional income statement illustrates the bigger picture of which lines are doing better than others, or if any shoes need to be discontinued. Contribution margin income statements are useful barometers for businesses on whether clear skies are ahead or if they need to hunker down for a storm. It’s also a cornerstone of contribution margin analysis, giving enormous insight into a business’s overall financial position.
In its simplest form, a contribution margin is the price of a specific product minus the variable costs of producing the item. What’s left is the contribution margin, which gives a sense of how much is left over to cover fixed expenses and make a profit. This figure helps companies understand how well a product or service is doing financially, and how many units need to be sold to cover the company’s fixed costs and turn a profit. The contribution margin can also help to determine an organization’s break-even point. This is where the revenue is the same as the total costs: the company isn’t making a profit but isn’t losing money either. In short, the contribution margin is like a safety net. A high contribution margin cushions the fall from unexpected costs and dips in sales. That’s why any business worth its salt will look to improve its margins wherever possible. Don’t confuse contribution margin and cost of goods sold . COGS only considers direct materials and labor that go into the finished product, whereas contribution margin also considers indirect costs.
A contribution format income margin is a financial metric that reveals the profitability of a product by separating its variable costs from its revenue. The margin is the amount remaining after you subtract variable costs from sales revenue, and that contributes to covering fixed costs and generating profit. The contribution format income margin is essential for understanding the financial performance of individual products or services and is used to make informed decisions about pricing, production, and cost management.
Contribution margin income statements aren’t rocket science, so let's take a look at a standard example statement based on a beauty company.
| Item | Amount |
| Revenue | $100,000 |
| Variable costs | $50,000 |
| Contribution margin | $50,000 |
| Fixed expenses | $25,000 |
| Net profit | $25,000 |
In this example, the beauty company generates $100,000 in revenue. The variable costs (raw materials, packaging, commissions) total $50,000, leaving a contribution margin of $50,000. After covering fixed expenses (rent, salaries), the net profit is $25,000. This detailed breakdown helps in understanding the financial performance of individual products or services.
The formula for determining the contribution margin is: Contribution margin = sales revenue − variable costs To work out the contribution margin, you need to understand the difference between an item’s fixed and variable expenses .
These costs don’t fluctuate with the level of production or sales an item makes—which is why they're sometimes called fixed production costs. No matter how much a company sells, the office rent still needs to be paid—so this is a fixed cost. Some other examples of fixed costs are equipment and machinery, salaries that aren’t directly related to the product's manufacturing, and fixed administrative costs.
Variable costs are not consistent and are directly related to the product’s manufacture or sales. They tend to increase as a company scales products and decrease with production. Some common examples of variable costs are raw materials, packaging, and the labor cost of making the product. Importantly, the contribution margin also includes indirect costs. Some great examples of these are sales commissions or referral fees. You don’t need to spend this money to create the product, but it is still included in the cost of making a sale. Although variable costs are more difficult to track, they are absolutely essential in predicting the true profitability of products such as electric vehicles , despite reductions in fixed costs. To get the contribution margin, you subtract these costs from the product's revenue.
As we know, the contribution margin is the money left over from the revenue after you’ve taken away all the costs associated with making the product, also known as the variable production costs. Here’s the formula in its simplest terms: Revenue - variable costs = contribution margin Let’s say that our beauty conglomerate sells 1,000 units of its bestselling skincare products for $50 each, totaling $50,000 in revenue. Looking at the variable expenses, each skincare product needs ingredients to be formulated, some nice packaging, and a good salesperson on commission. These total $28 per product. To calculate total variable costs, we multiply this by our 1,000 units and get $28,000. If we subtract the variable costs from the revenue, we’re left with a $22,000 contribution margin. Because this figure is usually expressed as a percentage, we’d then divide the contribution margin by the revenue to get the ratio of 0.44. Converted into a percentage, this leaves the beauty company with a 44% contribution margin on its skincare product. Getting this calculation right can be time-consuming and relies on consistent reporting for fixed and variable earnings. A lot of companies use financial statement software to remove the headache.
Going back to that beauty company example from earlier, we’ll assume the business has expanded into the high-end skincare market and wants to see how the new line is performing financially.
Let’s fill out a hypothetical contribution margin income statement for them:
