O’Malley Company sells 100,000 units for $13 a unit. Fixed costs are $350,000 and net income is $250,000. What should be reported as variable expenses in the CVP income statement?
a. $600,000.
b. $700,000.
c. $950,000.
d. $1,050,000.
The correct answer and explanation is :
Alright, let’s work through this carefully.
First, given:
- Sales = 100,000 units × $13 = $1,300,000
- Fixed Costs = $350,000
- Net Income = $250,000
The CVP income statement format is:
Sales – Variable Expenses = Contribution Margin – Fixed Expenses = Net Income
We can rearrange this:
Contribution Margin = Fixed Expenses + Net Income
Substituting the given values:
Contribution Margin = $350,000 + $250,000 = $600,000
Now, since:
Contribution Margin = Sales – Variable Expenses
We rearrange to find Variable Expenses:
Variable Expenses = Sales – Contribution Margin
Variable Expenses = $1,300,000 – $600,000
Variable Expenses = $700,000
Thus, the correct answer is (b) $700,000.
Full Explanation (300 Words):
In cost-volume-profit (CVP) analysis, a company’s income statement is structured to separate variable and fixed costs, helping managers understand how changes in volume impact profits. The CVP format highlights the relationship between costs, volume, and profit.
In this case, O’Malley Company’s sales revenue is calculated as the number of units sold multiplied by the selling price per unit:
100,000 units × $13 per unit = $1,300,000 total sales revenue.
The company also reports fixed costs of $350,000 and a net income of $250,000. In a CVP income statement, the contribution margin must first be determined. The contribution margin is what remains after covering variable costs and is available to cover fixed costs and provide profit.
Contribution Margin = Fixed Costs + Net Income
Contribution Margin = $350,000 + $250,000 = $600,000
This means $600,000 of the $1,300,000 sales revenue remains after paying all variable expenses. Now, to find the variable expenses, we recognize:
Variable Expenses = Sales – Contribution Margin
Variable Expenses = $1,300,000 – $600,000
Variable Expenses = $700,000
Thus, the amount of variable expenses that should be reported in the CVP income statement is $700,000.
The correct multiple-choice answer is b. $700,000.
This approach ensures that the CVP income statement properly reflects the company’s cost structure, which is essential for internal decision-making, planning, and evaluating profitability at different sales volumes.