The CVP income statement
a. is distributed internally and externally.
b. classifies costs by functions.
c. discloses contribution margin in the body of the statement.
d. will reflect a different net income than the traditional income statement.
The correct answer and explanation is :
The correct answer is: c. discloses contribution margin in the body of the statement.
Explanation:
The CVP (Cost-Volume-Profit) income statement is primarily used internally by management to analyze how changes in costs and volume affect a company’s operating income and net income. Unlike the traditional income statement — which classifies costs by function (like manufacturing, selling, and administrative expenses) — the CVP income statement focuses on cost behavior, separating costs into variable and fixed categories.
One major feature of the CVP income statement is the explicit disclosure of the contribution margin. The contribution margin is calculated as sales revenue minus variable expenses. It represents the amount of money available to cover fixed expenses and, after covering those, to contribute to profit. Showing the contribution margin in the body of the statement gives managers immediate insight into how efficiently a company is generating profits relative to its variable costs.
Here’s a simple structure of a CVP income statement:
- Sales
- Minus: Variable Expenses
- Equals: Contribution Margin
- Minus: Fixed Expenses
- Equals: Net Income
This clear layout helps managers quickly make decisions related to pricing, production levels, product line selections, and cost control.
Now, to clarify the wrong options:
- (a): The CVP income statement is used internally only; it is not typically distributed to external users like investors or creditors.
- (b): Costs in CVP are classified by behavior (variable or fixed), not by function.
- (d): The net income under the CVP and traditional income statements will be the same; the difference lies only in the presentation format, not the bottom-line figure.
Thus, option (c) is correct because the CVP income statement highlights contribution margin within the statement body.