Profit and loss statements can be further developed to what we call contribution margin accounting. Contribution margin accounting is important, because here you directly see the contribution, the difference between the revenues and the variable costs that you make with your products in order to basically cover all your fixed cost. It is a special income statement format that displays the variable and fixed costs separately, and this difference between the revenues and the variable cost, is what we call the contribution or the contribution margin. It describes an extended cost of sales method under variable costing in its vertical form. We can have either a simple contribution margin accounting, where you have the summary and allocation of all fixed costs in one block, or alternatively and more differentiated, a multi-level contribution margin accounting, where you have a gradual allocation of the fixed costs on the product, product group, divisional, and company level. Let's look at TerraX again. TerraX, SatFree, and SatX are three products of TerraVision. If we want to show the profit in a contribution margin accounting, we basically do the following: we would have the revenues of each product separately, TerraX, SatFree, and SatX, and we deduct from this revenue in absorption costing the total cost, that you see in the upper part here of this table, 49,500, 32,500, 28,400. But in contribution margin accounting, you would only deduct a variable parts of the cost, so here you see that the contribution margin of TerraX would be 20,500, 7,200, and 15,000. Now you would deduct all the fixed costs separately to arrive at the same profit of €1,600, the same profit as under absorption costing. However, what you now see is that if you have a closer look on the product of SatX, the contribution margin is positive, while the profit is negative. Absorption costing might lead you to the conclusion this SatX makes a negative profit, let's throw it out of our product portfolio. But if you do that, you would ultimately not gain €1,400. You would rather lose the contribution margin of this product of €15,000, because if you throw it out, you would lose the revenues and you would lose only the variable cost, and that means you lose the contribution margin instead of the loss. That is the importance of contribution margin accounting, where you basically look at the number, the contribution margin that gives you an idea whether your product should be kept within the product portfolio, or whether it should be thrown out. Positive contribution margin, keep it. Negative contribution margin, kick it out.
