Contribution margin statement

Contribution margin statement: A tool for profitability analysis

The contribution margin statement is a central business instrument for evaluating the profitability of products, services or departments. It determines the contribution margin (DB) — the difference between revenue and variable costs — and shows how much a product contributes to covering fixed costs.

What is the contribution margin?

The contribution margin indicates how much a product or service contributes to covering the company's fixed costs. It is the surplus that remains after deducting variable costs from the revenue generated. The contribution margin helps to determine when a product is profitable and is used to calculate the break-even point — the sales volume from which a company makes a profit.

Calculation of the contribution margin

Contribution margin accounting is a central cost accounting tool that helps companies analyze the profitability of products or services. It determines how much is contributed to covering fixed costs and generating profits by calculating the contribution margin. This is the result of the difference between revenue and variable costs.

Unit margin

The unit margin shows how much an individual product contributes to covering fixed costs. The calculation is carried out using the formula:

Unit margin = selling price per piece — variable costs per piece

A positive contribution margin means that the product generates profits. If the contribution margin is negative, the product does not contribute to covering fixed costs.

Total contribution margin

The total contribution margin is calculated by multiplying the unit margin by the sales quantity:

Total contribution margin = contribution margin × sales volume

The total contribution margin shows how much a product contributes to covering fixed costs in total.

Fixed costs and variable costs

In the contribution margin statement, costs are divided into variable costs and fixed costs:

• Variable costs: Increase with production volume (e.g. material costs).
• Fixed costs: Remain constant, regardless of production volume (e.g. rent, license fees).

Simple vs. multi-level contribution margin calculation

The contribution margin is used to analyse the economic efficiency of products or services and helps companies make well-founded decisions. A distinction is made between simple and multi-level contribution margins, which are used depending on the complexity of the cost structure.

Simple contribution margin calculation

Here, the variable costs of a product or service are deducted from sales revenue. The resulting contribution margin is used to cover fixed costs. If the margins for all products exceed fixed costs, the company makes a profit.

Multi-level contribution margin calculation

In multi-level contribution margins, fixed costs are divided into various categories, such as product-fixed costs, division-fixed costs and company-fixed costs. This more detailed method provides more detailed insights into the cost structure.

Relative contribution margin

The relative contribution margin is used in the event of bottlenecks in production, such as limited machine capacities. It is calculated by dividing the unit margin by the utilization of the bottleneck (e.g. production time). This helps to determine the optimal production program with limited resources.

Applications of contribution margin calculation in practice

The contribution margin statement is used in various areas of corporate management:

• Pricing policy 💸: Helps set prices that are both competitive and cover costs.
• Production planning 🏭: Decide which products should be produced and in what quantity to cover fixed costs.
• Product range design 🛒: Identifies products with a high contribution margin and optimizes the product portfolio.
• Cost management 📈: Monitors and optimizes a company's cost structure.

Example of calculating the contribution margin

A medium-sized company produces two different types of bikes: mountain bikes and city bikes. The variable costs per mountain bike are 300€, the selling price is 600€. The variable costs for city bikes are 200€ and the selling price is 450€. The company's monthly fixed costs amount to 20,000€.

Calculation of the contribution margin

• Contribution margin per mountain bike: Sales price — variable costs = 600€ — 300€ = 300€
• Contribution margin per city bike: Sales price — variable costs = 450€ — 200€ = 250€

Calculation of the break-even point

To cover fixed costs of €20,000, the company must either:

• 67 mountain bikes (20,000€ fixed costs ÷ 300€ contribution margin) or
• 80 city bikes (20,000€ fixed costs ÷ 250€ contribution margin)

sell. The company can now decide how to divide its production between the two products to cover fixed costs and make a profit.

conclusion

The contribution margin statement is an indispensable tool for determining the profitability of products and services. It supports companies with pricing, production planning, cost control and finally with process optimization. By knowing the contribution margin, well-founded decisions can be made to optimize profitability and secure long-term profits.