Cost-volume-profit (CVP) analysis is generally defined as a planning tool by which managers can evaluate the effect of a change(s) in price, volume, variable cost, or fixed costs on profit. Additionally, CVP analysis is the basis for understanding contribution margin pricing, related short-run decisions, target costing, and transfer pricing. As one of managerial accounting’s most basic analytical tools, CVP analysis is covered in all introductory managerial accounting texts.
Traditionally, equations are used to teach CVP analysis and to solve CVP problems. Because the equations method requires a before-tax set of equations and an after-tax set of equations, CVP analysis is frequently classified as before-tax and after-tax. While the before-tax equations are relatively straightforward, the after-tax equations are relatively complex and difficult for introductory managerial accounting students to understand and use. As a result, introductory managerial accounting textbooks either omit after-tax income CVP analysis or treat it separately, usually in an appendix, such that it can be easily omitted. Yet, income after taxes is the measure of wealth created by operations which managers cannot ignore and should not be omitted from introductory managerial accounting when a better method of teaching the topic is available.
This paper discusses an alternative method that is used in introductory managerial accounting classes to teach CVP analysis and to solve CVP problems – the contribution margin income statement. As the paper demonstrates, including income after-taxes using the contribution margin income statement for CVP analysis is straightforward, logical and is accomplished without additional effort or confusion. The equations are unnecessary and do not add value. They are eliminated.