What Are Variable Expenses in the Cost-Volume-Profit Income Statement?
Business owners analyze the cost of their supplies, the market selling price and current sales volumes. They review their financial statements and calculate financial ratios. Business owners also need to consider the impact on their financial statements that comes from selling additional units. This increases the company's revenue, but not by the complete selling price. Cost-volume-profit analysis (CVP analysis) enables the company to understand the impact of each additional sale. Companies use CVP income statements to assist in this analysis.
Other People Are Reading
-
Variable and Fixed Expenses
-
In order to create CVP income statements and perform CVP analysis, the company needs to segregate its variable expenses. The company reviews each of the expenses incurred by the company to determine which are fixed and which are variable. Variable expenses remain constant for each unit. However, total variable expenses increase as the total production increases. Fixed expenses remain the same in total regardless of the production quantity.
Contribution Margin
-
The contribution margin refers to the dollars available after considering all variable costs. The total contribution margin represents the total dollars remaining after subtracting the total variable costs from the total sales. The unit contribution margin refers to the amount of dollars contributed after selling one additional unit. The unit contribution margin is calculated by subtracting the variable cost per unit from the unit selling price.
-
CVP Income Statement Format
-
A CVP income statement communicates the contribution margin calculation in total and per unit. The CVP income statement starts by listing the total sales for the period. Then the total variable costs are subtracted to determine the total contribution margin. The company subtracts the fixed expenses from the contribution margin to calculate the net income for the period. The CVP income statement includes another number column that considers the per-unit dollars. The unit selling price is listed first. The company subtracts the variable cost per unit and determines the contribution margin per unit.
CVP Analysis
-
Companies use CVP analysis to determine how many units they must sell to break even or to earn a target profit level. The breakeven point occurs when the net income on the CVP income statement equals zero. Total sales divided by the unit selling price determines the sales quantity necessary to break even. Companies calculate the breakeven sales quantity by dividing total fixed expenses by the unit contribution margin. Companies calculate the sales quantity necessary to reach a target profit by dividing the sum of the total fixed expenses and the target profit by the unit contribution margin.
-
