A. Mastery Problem: Break-Even Point in Units and the Profit-Volume Graph CVP and the Contribution Margin Income Statement For planning and control purposes, managers have a powerful tool known as cost-volume-profit (CVP) analysis. CVP shows how revenues, expenses, and profits behave as volume changes. In CVP analysis, costs are classified according to behavior: variable or fixed. To arrive at operating income in CVP analysis, costs are classified by behavior on the income statement. This format is known as the contribution margin income statement. Complete the following table to illustrate the format. Select a or b to pick the correct decscription under the sales column Contribution Margin Income Statement
A. Mastery Problem: Break-Even Point in Units and the Profit-Volume Graph
CVP and the Contribution Margin Income Statement
For planning and control purposes, managers have a powerful tool known as cost-volume-profit (CVP) analysis. CVP shows how revenues, expenses, and profits behave as volume changes. In CVP analysis, costs are classified according to behavior: variable or fixed. To arrive at operating income in CVP analysis, costs are classified by behavior on the income statement. This format is known as the contribution margin income statement. Complete the following table to illustrate the format.
Select a or b to pick the correct decscription under the sales column
| Contribution Margin Income Statement | |
| Sales | $ XXX |
| (a. Less: Variable Cost or b. Less: Fixed costs) | (XXX) |
| (a. Contribution margin or b. Gross margin) | $ XXX |
| (a. Less: Variable Cost or b. Less: Fixed costs) | (XXX) |
| Operating income | $ XXX |
B. CVP and the Break-Even Point
Review the following concepts about CVP analysis and the break-even point and then complete the related statements.
(see below table for options per number)
| Concept | Statement | |
| 1. | It is important to understand contribution margin because it is used to determine the break-even point, which can help predict the success of a new venture or product. | At the break-even point, operating income is . |
| 2. | Contribution margin is the amount available to cover fixed costs. The CVP formula can be restated to reflect this. | At the break-even point, contribution margin is . |
| 3. | Managers analyze how changes in costs and selling prices will affect contribution margin and, therefore, the break-even point. An increase in selling price or a decrease in variable costs will cause the contribution margin to increase, providing more than enough to cover fixed costs. | When contribution margin increases, the break-even point will . |
| 4. | Likewise, if selling price decreases or variable costs increase, contribution margin will decrease and be less than fixed costs. | When contribution margin decreases, the break-even point will . |
| 5. | Any changes to fixed costs will affect the amount of contribution margin needed to cover fixed costs. | If fixed costs increase, the break-even point will ___. If fixed costs decrease, the break-even point will ___ |
1.a. 0
b.equal to fixed cost
c. equal to variable costs
d. equal to contribution margin
2. a. 0
b.equal to fixed cost
c. equal to variable costs
d. equal to contribution margin
3. a. decrease
b. increase
4. a. decrease
b. increase
c. not change
5. If fixed costs increase, the break-even point will
a. decrease
b. increase
c. not change
5b. If fixed costs decrease, the break-even point will
a. decrease
b. increase
c. not change
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
