A Revised Income Statement, The Contribution Margin ApproachAlford Lawn Mowers Corporation based in California manufacture’s lawn mowers. Its factory can manufacture a maximum of 6,000 units a year or an average of 500 units per month . The following inputs and definition were provided by its accountant in determining the company’s breakeven level output:Selling price per unit: $150Variable cost per unit: $50Total fixed cost per month: $20,000The Unit Contribution Margin is the difference between the company’s product selling unit price and its unit variable cost or expense (www.dwmbeancounter.
com). It is the amount available to cover fixed expenses and whatever remains will go towards profits. If the contribution margin is not sufficient to cover the fixed expenses, then a loss is noted for the period covered (www.accountingformanagement.com).Assuming that Alford Lawn Mower’s Corp. has been able to sell only one (1) unit during the month, its contribution margin income statement is shown below as:Alford Lawn Mowers Corp.
Contribution Margin Income StatementFor the Month of________ Total Per UnitSales (1 Unit only) $150 $150Less Variable Expenses 50 50 ———- ———Contribution Margin 100 100Less Fixed Expenses 20,000 ===== ======Net Operating Loss $(19,900)Whenever the company sells an additional unit, $100 more in contribution can help cover the fixed expenses of the company in a month time. A second unit sold then can increase the contribution margin by $100 (total of $200); the company’s loss will now total to $19,800, a decrease by $200.To at least break even or either a profit or loss for the company, but to cover only its expenses or costs, it has to sell $20,000 worth of product units. Since each unit sold contributes $100 in the contribution margin, the company has to sell 200 units to reach break even point or where the fixed expenses can be covered or zeroed out for the defined period.
The contribution margin income statement will now appear as:Alford Lawn Mowers Corp.Contribution Margin Income StatementFor the Month of________ Total Per UnitSales (200 Units) $30000 $150Less Variable Expenses 10000 50 ———- ———Contribution Margin 20,000 100Less Fixed Expenses 20,000 ===== ======Net Operating Profit $ 0 ======References“Contribution Margin Method”. Retrieved July 29, 2009. http://www.dwmbeancounter.
com/breakeven.html“Definition and Explanation of Contribution Margin”. Retrieved July 29, 2009 http://www.accountingformanagement.com/cost_volume_profit_analysis.htm