CVP INCOME STATEMENT

Because CVP is so important for decision‐making, management often wants this information reported in a  cost‐volume‐profit (CVP) income statement  format for internal use. The CVP income statement classifies costs as variable or fixed and computes a contribution margin.  Contribution margin (CM)  is the amount of revenue remaining after deducting variable costs. It is often stated both as a total amount and on a per unit basis.

We will use Vargo Video Company to illustrate a CVP income statement. Vargo Video produces a high‐definition digital camcorder with 15× optical zoom and a wide‐screen, high‐resolution LCD monitor. Relevant data for the camcorders sold by this company in June 2017 are as follows.

ILLUSTRATION 18-11 Assumed selling and cost data for Vargo Video

The CVP income statement for Vargo therefore would be reported as follows.

ILLUSTRATION 18-12 CVP income statement, with net income

A traditional income statement and a CVP income statement both report the same net income of $120,000. However, a traditional income statement does not classify costs as variable or fixed, and therefore it does not report a contribution margin. In addition, sometimes per unit amounts and percentage of sales amounts are shown in separate columns on a CVP income statement to facilitate CVP analysis. Homework assignments specify which columns to present.

In the applications of CVP analysis that follow, we assume that the term “cost” includes all costs and expenses related to production and sale of the product. That is, cost includes manufacturing costs plus selling and administrative expenses.

DECISION TOOLS

The unit contribution margin indicates by how much every unit sold will increase income.

Unit Contribution Margin

The formula for  unit contribution margin  and the computation for Vargo Video are as follows.

Unit Selling Price−Unit Variable Costs=Unit Contribution Margin$500−$300=$200Unit Selling Price−Unit Variable Costs=Unit Contribution Margin$500−$300=$200

ILLUSTRATION 18-13 Formula for unit contribution margin

Unit contribution margin indicates that for every camcorder sold, the selling price exceeds the variable costs by $200. Vargo generates $200 per unit sold to cover fixed costs and contribute to net income. Because Vargo has fixed costs of $200,000, it must sell 1,000 camcorders ($200,000÷$200)($200,000÷$200) to cover its fixed costs.

At the point where total contribution margin exactly equals fixed costs, Vargo will report net income of zero. At this point, referred to as the  break‐even point , total costs (variable plus fixed) exactly equal total revenue. Illustration 18-14 shows Vargo’s CVP income statement at the point where net income equals zero. It shows a contribution margin of $200,000, and a unit contribution margin of $200 ($500−$300)$200 ($500−$300).

ILLUSTRATION 18-14 CVP income statement, with zero net income

It follows that for every camcorder sold above the break‐even point of 1,000 units, net income increases by the amount of the unit contribution margin, $200. For example, assume that Vargo sold one more camcorder, for a total of 1,001 camcorders sold. In this case, Vargo reports net income of $200, as shown in Illustration 18-15.

ILLUSTRATION 18-15 CVP income statement, with net income and per unit data

Contribution Margin Ratio

Some managers prefer to use a contribution margin ratio in CVP analysis. The contribution margin ratio is the contribution margin expressed as a percentage of sales, as shown in Illustration 18-16.

ILLUSTRATION 18-16 CVP income statement, with net income and percent of sales data