Why is the Contribution Income Statement very useful in a CVP analysis?© BrainMass Inc. brainmass.com December 24, 2021, 10:09 pm ad1c9bdddf
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The cost-volume-profit (CVP) is a "tool that helps managers understand the relationships among cost, volume, and profit" (Brewer, Garrison & Noreen, 2007, p. 240). Cost-volume-profit (CVP) analysis is concerned with the effects on net operating income of:
1. Selling prices
2. Sales volume
3. Unit variable costs
4. Total fixed costs
5. The mix of products sold.
The CVP analysis provides information that helps managers to make informed decisions. For instance, the analysis can be used to establish sales prices, as well as selecting product mix for production. It can also be used when making marketing strategies, as well as analyzing the impact on profits by changes in product costs. The current market condition demands of managers to make fast and accurate decisions that CVP analysis is used to aid in that decision making process.
A contribution format income statement is very useful in CVP analysis because it highlights cost behavior. The contribution margin in the statement must first cover the fixed expenses. If the fixed expenses are not covered, then there is a loss. Therefore, the contribution format income statement would provide managers with information that accurately present the current monetary situation of the company. In addition, the contribution margin is the revenue excess from sales over variable costs. The concept of contribution margin is particularly useful in the planning of business because it gives an insight into the potential profits that a business can generate in future.© BrainMass Inc. brainmass.com December 24, 2021, 10:09 pm ad1c9bdddf>