Essential features of a cost-volume-profit income statement
The cost-volume-profit income statement is critical in the decision-making of a business. This type of income statement differs from the other type of statements used to report profits. This statement of income has numerous features that distinguish it as a tool used in financial reporting (DuBrin, 2009). In the CVP income statement, a business treats costs as variable costs and fixed costs. In addition, the contribution margin is computed as the balance of the amount after deducting all variable costs.
Cost-volume-profit (CVP) stamen analysis is used to establish how cost changes and changes in the volume of production shifts a firm’s net income. To compute CVP, several assumptions are made to ensure that all the necessary results are achieved (DuBrin, 2009).
The cost-volume-profit income statement analysis has several assumptions. First, it assumes that selling prices, variable costs, and fixed costs are constant. The other feature of CVP is that all products that are produced by a firm are sold. Lastly, CVP assumes that a company produces and sells more than one type of product, which are sold in the same product mix (DuBrin, 2009).
Break-even analysis in business decisions
It is an analysis conducted to determine the point at which business revenues equal costs attributed to the revenues received. This analytic method computes the margin of safety at which a business begins to shade off the risks of collapse toward a profitable future.
The break-even analysis helps an organization evaluate the cost of sales. This indicator helps managers to make decisions that can make an organization to cause the development of competitive prices and bids. Since it is a point that defines the lowest possible production point that yields equalizing revenues, it helps managers to estimate and implement production levels that will yield optimal profits (DuBrin, 2009).
Break-even analysis is a mathematical computation that computes a point where a business begins to make profits after the initial investment. At a break-even point, the costs are equal to returns. This factor is critical to businesses because businesses use this measure to tell when, and by how much the business shall make profits.
Sales mix and its effect on break-even analysis
The sales mix is referred to as the relative percentage of in which a firm sale its mix or multiple products (DuBrin, 2009). Each product in a sales mix has its strength expressed as a contribution margin. Where a company decides to compute its break-even point using sales mix, there is a computation of weighted-average unit contribution margin of multiple products forming the sales mix (DuBrin, 2009).
Usually, each product has its profitability index and a shift in the contribution of each product in the sales mix changes the entire break-even point. Studies suggest that where a company operates in a low-growth market, implementing leading-edge sales and marketing strategies to boost products with high profitability will help to shift the sales mix, which affects the final BEP (DuBrin, 2009). This means that if a sales mix changes in favor of products with the highest profit, margins create a favorable break-even amount. The final effect is that a favorable sales mix, even where you have low sales will cause a business to achieve break-even at the earliest time possible.
Reference
DuBrin, A. J. (2009). Essentials of management. Mason, OH: Thomson Business & Economics.