Definition of Contribution Margin
Contribution margin is defined as revenues minus the variable costs and variable expenses.
Example of Contribution Margin
Assume that a retailer had sales of $400,000 and its cost of goods sold was $250,000. The retailer’s variable selling and administrative expenses were $30,000 and its fixed selling and administrative expenses were $100,000.
The retailer’s contribution margin is: sales of $400,000 minus variable costs of $280,000 = $120,000. The contribution margin as a percentage of sales is 30% ($120,000/$400,000).
Definition of Operating Income
A retailer’s operating income is its sales minus the cost of goods sold and all selling and administrative expenses (fixed and variable). Operating income is also the net income before any nonoperating items such as interest revenue, interest expense, gain or loss on the sale of plant assets, etc.
Example of Operating Income
Using the amounts from above example, the retailer’s operating income is: sales of $400,000 minus the cost of goods sold of $250,000 minus the fixed and variable selling and administrative expenses of $130,000 = $20,000. The operating income as a percent of sales is 5% ($20,000/$400,000).
