Contribution margin income statement

Definition

A contribution margin income statement is a type of income statement where variable expenses are subtracted from sales to show the contribution margin, which then covers fixed expenses and generates net operating income. This format aids in understanding cost behavior and decision-making.

5 Must Know Facts For Your Next Test

1. The contribution margin income statement categorizes costs as either variable or fixed.
2. Contribution margin is calculated by subtracting total variable costs from total sales revenue.
3. This type of income statement helps in performing cost-volume-profit (CVP) analysis.
4. It provides insights into how changes in sales volume affect profitability.
5. The contribution margin ratio is calculated by dividing the contribution margin by total sales.

Review Questions

• What types of costs are separated in a contribution margin income statement?
• How do you calculate the contribution margin?
• Why is the contribution margin income statement useful for cost-volume-profit analysis?

Related terms

Variable Costs: Costs that vary directly with the level of production or sales volume.

Fixed Costs: Costs that remain constant regardless of production or sales volume within a certain range.

Cost-Volume-Profit Analysis (CVP): A method used to understand the relationship between costs, sales volume, and profit.