Income Statement for Contribution Margin: Break-even Point in Dollars

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

Fixed and Variable Expenses

Before you begin your calculations, you need to understand fixed and variable expenses.

Variable costs are any costs that do not remain constant. These costs can include energy, wages (for production-related labor), or any other costs that rise or fall with production levels in your business.

Fixed costs are costs that may change over time but are not tied to production levels. These costs include equipment rental, building lease, storage space, or salaries (not directly tied to production. If they are, you consider them variable costs).

The income statement for contribution margin subtracts variable costs from sales and arrives at the contribution margin. Then fixed costs are subtracted to reach net profit or loss for the period.

Calculating Your Contribution Margin

The first step in creating a contribution margin income statement is calculating the contribution margin. To do this, you will need sales revenue and variable cost information. Variable costs will include related variable administrative costs and any variable costs related to production. The formula for contribution margin is:

Net product revenue (sales) – Total variable costs ÷ Product revenue

For example, if your product revenue is $500,000 and your total variable costs are $250,000, your contribution margin would be 250,000 ÷ 500,000, or 50%.

Calculating Your Contribution Margin Income

To calculate your contribution margin income, you will need to know your total fixed production expenses (production expenses, fixed administrative expenses, and sales expenses) and subtract that value from the contribution margin. The formula is:

Contribution margin – Total fixed production expenses = Net profit or loss

If your total fixed production expenses are $300,000, you will have a loss of (50,000) dollars (250,000 – 300,000). This is a loss, so you will need to figure out how to make up the loss of -50,000 dollars by increasing sales or reducing fixed costs.

You will need to cut costs by 50,000 dollars to break even. To calculate the amount of sales increase, divide the loss by the contribution margin.

50,000 ÷ 50% = 100,000 dollars

You will need to increase sales by 100,000 dollars to break even.

A simple contribution margin income statement looks something like this:

Contribution Margin Income Statement

Sales: $500,000

Variable Expenses (administrative and sales and production): $250,000

Contribution Margin: $250,000

Fixed Expenses (production and overhead and sales): $250,000

Administrative Costs: $50,000

Net Profit or Loss: (50,000) dollars

Break-even Point in Dollars or Units

The break-even point is the point at which your sales equal your costs. The break-even point can be calculated in units or dollars. If you calculate it in units, the formula would be as follows:

Fixed costs ÷ (Revenue per unit – Variable cost per unit) = Break-even point (units)

As for the break-even point in dollars, it would be:

Fixed costs ÷ Contribution margin = Break-even point

In a different example than the previous one, if you sold 650 units in a certain period, resulting in a net profit of $650,000, your revenue per unit is $1,000. If the variable costs were $250,000, you would have $385 in variable costs per unit (variable costs ÷ units sold).

Fixed costs per unit ÷ (Revenue per unit – Cost per unit) = Break-even point in units

Revenue cost per unit – Cost per unit ($1,000 – $385) = $615

Fixed costs $300,000 ÷ $615 = 487

You were

You need 487 units to break even during this period. More than 488 units results in profit, and 486 units or less leads to a loss.

When calculating contribution margin and break-even point, be sure to use units or value consistently unless you are comfortable converting them back and forth. Depending on who is viewing your information, you may need to report if you wish to use both methods.

People concerned with the financial aspects of the business may be more able to understand the break-even point in dollars; whereas the person interested in operations might be more concerned with the break-even point in units.

Source: https://www.thebalancemoney.com/contribution-margin-income-statement-393473