 The contribution margin income statement is used for many internal decisions. This is because costs are grouped by behavior rather than function, and that provides better internal information. You recall that the contribution margin itself is revenues minus variable costs. The full income statement is revenues minus variable costs equals contribution margin. From that we subtract fixed costs to get operating income. When contribution margin equals fixed costs, operating income is zero. We call this term break-even. Here is an example of the contribution margin income statement. So let's learn how to use the information on the contribution margin income statement to make business decisions. To start with, let's learn this simple yet useful concept called contribution margin per unit. It is calculated by taking the sales price per unit and subtracting the variable cost per unit. It's the amount of each sales dollar that is available to cover fixed costs and normal profits. In this example, the price per unit is $500 and the variable cost per unit is $300. Thus the contribution margin is $200 per unit. When a company sells one more unit, it gets an additional $200 of contribution margin. Another important concept is the contribution margin ratio. It is calculated by taking contribution margin per unit and dividing it by the unit price. It is a percentage of each sales dollar that is available to cover fixed costs and normal profits. In this example here, the unit contribution margin is $200 and the unit price is $500, so the contribution margin ratio is 40%. We will use both the unit contribution margin and the contribution margin ratio when we learn about cost volume profit analysis. Cost volume profit analysis, commonly referred to as CVP analysis, is a powerful tool used by managers to look how changes in costs, sales price and volume affect a firm's profit. Additionally, this analysis is used to identify the volume of sales necessary to achieve break-even or some targeted profit number. CVP analysis is basically elementary algebra. We have five variables, volume, sales price, variable costs, fixed costs and operating income. As long as we know four of these variables, we can solve for the fifth. Yes, I said algebra, that thing you told your parents you would never use in real life. We will continue CVP analysis to determine how many units a company needs to sell to break-even or to achieve a target profit.