Maximizing Profits: A Step-by-Step Guide to Calculating Operating Income with Contribution Margin

How to get operating income after calculating contribution margin

Contribution marginFixed costs:Fixed manufacturing costsFixed operating costsTotal fixed costsOperating income

To calculate operating income or operating profit after calculating contribution margin, you need to follow these steps:

Step 1: Determine the Total Sales Revenue
First, you need to know the total sales revenue. This is the amount you receive when you sell your products or services. For example, if you sell 1,000 units of a product for $10 each, your total sales revenue would be $10,000.

Step 2: Calculate the Total Variable Costs
Next, you need to calculate the total variable costs. These are the costs that vary with the level of production or sales, such as the cost of raw materials, direct labor, and shipping. To calculate total variable costs, multiply the total number of units sold by the variable cost per unit. For example, if the variable cost per unit is $5 and you sell 1,000 units, your total variable costs would be $5,000.

Step 3: Calculate the Contribution Margin
Subtract the total variable costs from the total sales revenue to get the contribution margin. This is the amount that contributes to covering fixed costs and generating a profit. For example, if your total sales revenue is $10,000 and your total variable costs are $5,000, your contribution margin would be $5,000.

Step 4: Calculate the Operating Income
To calculate the operating income or operating profit, subtract your fixed costs from the contribution margin. Fixed costs include things like rent, salaries, and other overhead expenses that do not vary with the level of production or sales. For example, if your fixed costs are $3,000, your operating income or operating profit would be $2,000.

Therefore, the formula for calculating operating income with contribution margin is:

Operating Income = Contribution Margin – Fixed Costs.

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