Question

A major reason for using the CVP income statement is that

A. it indicates the sales mix of the company's products or services.
B. it increases information available to management.
C. it separates variable and fixed cost components.
D. it allows management to establish what sales level is necessary to cover fixed costs.

Answer 1

The CVP income statement is crucial for separating variable and fixed cost components, offering management a clear perspective on cost structure and its impact on business decisions to maximize profits.

Step-by-step explanation:

A major reason for using the CVP income statement is that it separates variable and fixed cost components. This statement is focused on Cost-Volume-Profit analysis and serves as a critical tool for management to understand the relationship between costs, revenues, and profit at different levels of production and sales volumes. Through the CVP income statement, a firm can gain insights into its profitability by breaking down total costs into fixed costs, which are expenses that do not change with the level of output, and variable costs, which vary directly with the level of output.

In the context of making economic decisions, fixed costs are considered sunk costs in the short run and thus should not influence future production or pricing decisions. On the other hand, variable costs typically show diminishing marginal returns, leading to an increase in marginal cost as output levels rise. This understanding helps to better predict the profit-maximizing quantity and the price to charge for products or services.