Question

1) What is a CVP income statement used for?

2) Explain the term sales mix and its effects on break-even sales.

3) What is Margin of Safety and how does it get used in CVP Analysis?

4) How does a company determine sales mix when a company has limited resources?

5) How does operating leverage affect profitability?

Answer 1

Solution:

Problem 1 --- What is a CVP income statement used for ?

Solution:

CVP Income Statement is also known as Cost-Volume-Profit Statement or Analysis.

CVP statement is used to determine the effect of a company’s operating income due to changes in costs and volume.

CVP statement requires that all the company’s costs, like manufacturing, selling and administrative costs, be identified as variable or fixed.

Under the CVP Statement, contribution margin and contribution margin ratio provides key information .

Contribution Margin represents the amount of income or profit the company made before deducting fixed costs.

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