6.3 Income Statement

Your company can use the income statement to diagnose problems on a product by product basis. Sales for each product are reported in dollars (not the number of products). Subtracting variable costs from sales determines the contribution margin. Inventory carrying costs are driven by the number of products in the warehouse. If your company has $0 inventory carrying costs, you stocked out of the product and most likely missed sales opportunities. If your company has excessive inventory, your carrying costs will be high. Sound sales forecasts matched to reasonable production schedules will result in modest inventory carrying costs.

Period costs are depreciation added to sales, general and administrative (SG&A) costs (which include R&D, promotion, sales and administration expenses). Period costs are subtracted from the contribution margin to determine the net margin. The net margin for all products is totaled then subtracted from other expenses, which in the simulation include fees, write-offs. This determines earnings before interest and taxes, or EBIT. Finally, interest, taxes and profit sharing costs are subtracted to determine net profit.

Once your decisions are final, you can print your proforma income statement (click the printer icon). When the simulation advances to the next year, you can compare the results to your proforma projections.