Mastery Problem: 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. Costs are classified by behavior on the income statement in CVP analysis to arrive at operating income. This format is known as the contribution margin income statement. Complete the following table to illustrate the format. Contribution Margin Income Statement Sales $ XXX (XXX) $ XXX (XXX) Operating income $ XXX Feedback Check My Work Review the components of the Contribution Margin Income Statement and the underlined definitions above to determine their relationships in this statement. Contribution margin is calculated first. It is the difference between sales and variable costs. Contribution margin is the amount that is available to pay costs. After those costs are paid, anything remaining from contribution margin becomes Feedback Check My Work Rework the formula from the contribution margin income statement to solve for Fixed Costs: Fixed Costs = Sales - Variable Costs - Operating IncomeCVP and the Break-Even Point Review the following concepts about CVP analysis and break-even point and then complete the related statements. Concept Statement It is important to understand contribution margin because it is used to determine the break-even At the break-even point, point, which can help predict the success of a new venture or product. The CVP formula can be operating income is used to determine the break-even point. Contribution margin is the amount available to cover fixed costs. The CVP formula can be At the break-even point, restated to reflect this. contribution margin is Managers analyze how changes in costs and selling prices will affect contribution margin and, When contribution margin therefore, the break-even point. An increase in selling price or a decrease in variable costs will increases, the break-even cause contribution margin to increase, providing more than enough to cover fixed costs. point will When contribution margin Likewise, if selling price decreases or variable costs increase, contribution margin will decrease decreases, the break-even and be less than fixed costs. point will If fixed costs increase, the Any changes to fixed costs will affect the amount of contribution margin needed to cover fixed break-even point will costs. If fixed costs decrease, the break-even point willAPPLY THE CONCEPTS: Break-Even Point in Units The break-even point can be expressed in terms of sales dollars or number of units. The break-even units tells us how many units must be sold so that operating income is $0. Assume that you are part of the accounting team for Brooks Digital. The company currently expects to sell 533 units for total revenue of $16,900 each month. Brooks Digital estimates direct materials costs of $3,150, direct labor costs of $4,200, variable overhead costs of $2,100, and variable selling and administrative costs of $1,050. Fixed costs of $4,800 are also expected, which includes fixed overhead and selling and administrative costs. Using this information, complete the contribution margin income statement shown below. Brooks Digital Contribution Margin Income Statement Sales Operating income $ Feedback Check My Work Brooks Digital is examining cost behavior patterns. Your recommendation is to first determine the break-even point in units. First, calculate the contribution margin (CM) per unit (rounded to the nearest dollar). $ Next, complete the formula below to determine the break-even units. Total Fixed Costs / Contribution Margin per Unit = Units $ units Feedback Check My WorkAPPLY THE CONCEPTS: The Profit-Volume Graph A profit-volume graph helps managers to visualize the relationship between profits and units sold. The data for Brooks Digital has been used to construct the profit-volume graph below. The purple points (diamond symbols) plot the profit line. The operating loss is the shaded area bordered by the red points (cross symbols). The operating profit is the area bounded by the green points (triangle symbols). Choose the correct profit-volume graph for Brooks Digital PROFIT (Dollars) 10000 Oper. Profit Area A 7500 5000 Oper. Loss Area 2500 Profit Line -2500 -5000+ -7500 -10000 0 200 400 600 800 1000 UNITS OF SALES Clear All Help PROFIT (Dollars) 10000 Oper. Profit Area 7500 5000 Oper. Loss Area 2500 Profit Line ) -2500 5000 -7500 -10000 0 200 400 600 800 1000 UNITS OF SALES Clear All HelpPROFIT (Dollars) 10000 Oper. Profit Area A A 7500 5000 Oper. Loss Area 2500 Profit Line -2500 -5000 -7500 -10000 0 200 400 600 800 1000 UNITS OF SALES Clear All |Help C. PROFIT (Dollars) 10000 Oper. Profit Area A 7500 5000 Oper. Loss Area 250 Profit Line -2500 -5000 -7500 -10000 0 200 400 600 800 1000 UNITS OF SALES Clear All Help D.APPLY THE CONCEPTS: Effect of Changes to Sales Price, Variable Costs and Fixed Costs Now consider each of the following scenarios for Brooks Digital. Calculate the contribution margin (CM) per unit, rounded to nearest dollar, and the new break-even point in units, rounded to the nearest whole unit, for each scenario separately. Scenario 1 Scenario 2 Scenario 3 Brooks has been experiencing quality problems with a After some extensive market research, Brooks has materials supplier. Changing suppliers will improve the Brooks will dispose of a machine in determined that a sales price increase of $2 per the factory. The depreciation on quality of the product but will cause direct materials that equipment is $500 per month. unit will not affect the sales volume and will be costs to increase by $1 per unit. effective immediately. CM per unit: $ CM per unit: $ CM per unit: $ Break-even units: Break-even units: units Break-even units: units units