Week 2 - Assignment 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 Less: Variable costs V J (xxx) Contribution margin V J $ xxx 9 Less: Fixed costs V J (xxx) Operating income $ XXX Feedback ' Check My Work Review the components of the Contribution Margin Income Statement and the underlined denitions above to determine their relationships in this statement. Contribution margin is calculated first. It is the difference between sales and variabie costs. Contribution margin is the amount that is available to pay fixed V costs. After those costs are paid, anything remaining from contribution margin becomes Erofit V . CVP and the Break-Even Point CVP 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 breakieven paint, which can help predict the success of a new venture or product. The C l/P formula can be used to determine the break-even point. At the break-even point, operating income is go V . Contribution margin is the amount available to cover xed costs. The CVP formula can be restated to reect this. At the break-even point, contribution margin is egual to fixed costs V . 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 contribution margin to increase, providing more than enough to cover xed costs. When contribution margin increases, the break-even point will decrease V . Likewise, if selling price decreases or variable costs increase, contribution margin will decrease and be less than xed costs. When contribution margin decreases, the break-even point will increase V . Any changes to xed costs will affect the amount of contribution margin needed to cover xed costs. If fixed costs increase, the break-even point will increase V . If fixed costs decrease, the break-even point will decrease V . APPLY THE CONCEPTS: Break-Even Point in Units The break-even point can be expressed in terms of sales dollars or number of units. The breakaeven 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 Koller Digital. The company currently expects to sell 842 units for total revenue of $21,450 each month. Koller 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 $9,750 are also expected, which includes fixed overhead and selling and administrative costs. Using this information, complete the contribution margin income statement shown below. Koller Digital Contribution Margin Income Statement Sales $[: Less: Variable costs V [3 Contribution margin V $C] Less: Fixed costs V I: Operating income $i: Koller 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). 3;: Next, complete the formula below to determine the break-even units. Total Fixed Costs/ Contribution Margin per Unit = Units 8:59 PM Wed Nov 15 1 73% Done Assignment Score: 12.5% Email Instructor Save and Exit Submit Assignment for Grading8:59 PM Wed Nov 15 1 73% Done Assignment Score: 12.5% Email Instructor Save and Exit Submit Assignment for Grading