Question

"Break-even analysis is of limited use to management because a company cannot survive by just breaking even." Do you agree with this statement? Please explain. Discuss the components of the Contribution Margin Income Statement, how does management use this in the decision making process?

Answer 1

1)

There are 2 types of costs in marginal costs.

i) Variable cost

ii) Fixed cost

At breakeven point sales will be equal to total cost.

Sales = Variable cost + Fixed cost

(or)

Total revenue = Total cost

The given statement is false because a company can survive just by breaking even because all the costs incurred are recovered. At Breakeven point there is no profit or loss. As long as there is no loss, a company can continue its operations.

2)

The components of contribution margin income statement are:

Sales, Variable cost, Contribution margin, Fixed cost and net operating income.

The contribution margin income statement format is as follows:

Sales

(Less): Variable cost

Contribution margin

(Less): Fixed cost

Net operating income

Management can use contribution margin income statement to find the profit (or) loss and thereby decide to start/continue (or) drop a product.

If a product (or) business earns profit, it can be started/continued and if there is a loss the product (or) business can de dropped.