Contribution margin reporting shares useful information with company managers. Company managers use this information to calculate the breakeven point, or the level of sales required to pay all expenses. Managers also use this information to make decisions, such as agreeing to sell products at a reduced price. The contribution margin equals total revenue minus all variable expenses. It represents the money available to pay fixed expenses, and increase the profits of the business. A contribution format income statement lists the revenue and variable costs, and presents the contribution margin.
1. Read the contribution format income statement, and locate the contribution margin.
2. Read the contribution format income statement. Locate the variable costs.
3. Add the contribution margin and the variable costs. This calculates the total sales recognized by the company.
4. Review the production report. Locate the total quantity of units produced.
5. Divide the total sales by the total quantity produced -- this calculates the unit selling price.
- This method assumes the company only sells one product, and that the selling price calculated applies to that product. If the company sells multiple products, you need to use a contribution format income statement by item. This allows you to determine the selling price for a specific item.
- As you increase the selling price, the contribution margin and net profit also increase. When you decrease the selling price, the contribution margin and net profit also decrease.
- Businesses use various formats when they create income statements. These include the traditional income statement, the multiple step income statement, and the contribution format income statement. The contribution format income statement is the only one that lists the variable costs and the contribution margin. The other formats require additional analysis to arrive at these numbers.
- Two types of selling prices exist. These include the base selling price and the adjusted selling price. The adjusted selling price reduces the base price by any discounts offered to the customer. Total sales revenue includes sales that occurred at the base price, as well as sales that occurred at an adjusted price. The selling price calculated consists of an average of all selling prices.