Contribution Margin vs. Traditional Income Statements

Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

Contribution margin income statements subtract variable costs from the total sales, whereas traditional income statements subtract groups of different costs from total sales. Differentiate between these two income statements to see their applications. Updated: 12/14/2021

What Is an Income Statement?

If you're running a business, no matter what size, you want to know where your money is going. However, different sized businesses have different priorities when it comes to tracking income. Luckily, there are two common styles of income statements that you can use: the contribution margin income statement and the traditional income statement.

Income statements show how much money a company has made and how much money a company has spent during a specific period of time. These statements are among the most important documents that a company will produce. After all, they show whether or not a company has managed to turn a profit during a particular period of time.

The contribution margin income statement and the traditional income statement, are both useful for doing this. However, different companies may find different versions more useful. In this lesson, we're going to go over the differences between a contribution margin income statement and a traditional income statement. We'll learn the format of each, as well as some important differences between the two.

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  • 0:03 What Is an Income Statement?
  • 1:03 Contribution Margin…
  • 1:36 Traditional Income Statements
  • 2:17 Important Differences
  • 2:45 Lesson Summary
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Contribution Margin Statements

Let's say that you've got a major company. You've got the staying power to not have to worry about meeting your fixed costs every period, but you want to know how much you're contributing to them. In short, you need a contribution margin income statement, which starts with your total amount of sales then moves on to subtract all variable costs. From that you get the contribution margin, which pays off your fixed costs and ultimately earns you profit. Here's an example of a simplified contribution margin income statement:

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