Final answer:
Focusing on target net income in CVP analysis increases the breakeven point because it requires covering additional financial obligations such as interest and taxes in addition to operating expenses. This ensures the firm also achieves its net profitability goal, not just its operational breakeven.
Step-by-step explanation:
In CVP analysis, focusing on target net income rather than operating income will indeed affect the breakeven point. Specifically, the breakeven point will increase when taking into consideration the target net income. This is because the target net income includes not just the expenses covered in operating income (such as cost of goods sold and operating expenses) but also takes into account other financial items like interest and taxes that must be paid.
To calculate the breakeven point considering net income, one must add the desired net income to the fixed costs before dividing by the contribution margin per unit. This higher threshold ensures that not only operating costs are covered, but also that there is enough revenue to meet the desired net profitability.
The importance of covering both variable and fixed expenses is clear. If prices are above the level where marginal cost (MC) crosses average cost (AC) at the zero profit point, a firm will earn profits. However, if prices are below the breakeven point but above the shutdown point, where MC crosses average variable cost (AVC), the firm could still cover its variable costs yet incur losses in the short run. Therefore, the calculation of the breakeven point must consider both average cost and average variable cost factors.