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Chapter 9
CHAPTER 9
BreakEven Point and
CostVolumeProfit Analysis
QUESTIONS
1. The variable costing income statement classifies costs by the way they behave.
Variable costs are deducted from revenues to determine contribution margin and
then fixed costs are deducted from contribution margin to determine operating profit.
Breakeven analysis involves a study of fixed costs, variable costs and revenues to
determine the volume at which total costs equal total revenues. Hence, variable
costing provides the variable and fixed cost classification needed to compute break
even. The absorption costing income statement uses a functional classification
manufacturing and nonmanufacturing coststo compute gross profit and then
operating income respectively.
A functional classification requires cost to be
classified based on the reason it was incurred, i.e., selling, administrative, or
production.
This classification does not separate variable from fixed costs and is
therefore not useful in computing breakeven.
2.
The breakeven point is the starting point for CVP analysis because before a
company can earn profits, it must first cover all of its variable and fixed costs; the
point at which all costs are just covered is the breakeven point.
The formula
approach requires solving for the exact breakeven using the following algebraic
equation: R(X)– V(X) – FC = 0; where R is revenue per unit, X is volume, V is
variable cost per unit, and FC is fixed cost.
The graph approach provides a visual relationship between revenues and costs. The
breakeven point is where the total revenue line intersects the total cost line on the
traditional or costvolumeprofit graph or where the profit line intersects the xaxis on
the profitvolume graph.
Unlike the formula approach, the graph approach does not
provide a precise solution because exact points cannot be determined from a visual
view of the graph. The income statement approach requires preparing an income
statement to prove the accuracy of the computations of breakeven.
Only by trial
anderror can the exact breakeven be determined using the income statement
approach.
3. The contribution margin ratio is contribution margin per unit divided by selling price
per unit.
It represents the proportion of revenue that remains after variable costs are
covered.
The contribution margin ratio can be used to calculate breakeven in sales
dollars by dividing fixed costs by the contribution margin ratio.
4. The usefulness of CVP analysis is its ability to clearly forecast income expected to
result from the shortrun interplay of cost, volume, price, and quantity.
It is often
useful in analyzing current problems regarding product mix, make or buy, sell or
process further, and pricing.
In the long run, however, all of these factors and their relationships and the
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 Spring '11
 medvil
 Cost Accounting, Income Statement, Revenue

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