During the current year, XYZ Company increased its variable SG&A

Question:

During the current year, XYZ Company increased its variable SG&A expenses while keeping fixed SG&A expenses the same. As a result, XYZ’s:

a. Contribution margin and gross margin will be lower.

b. Contribution margin will be higher, while its gross margin will remain the same.

c. Operating income will be the same under both the financial accounting income statement and contribution income statement.

d. Inventory amounts booked under the financial accounting income statement will be lower than under the contribution income statement.

Answer:

COST-VOLUME-PROFIT ANALYSIS:

It is a planning process used by the management of a company to predict the volume of activity, costs, sales and profits in future. It refers to a point where total revenue is equal to total costs. So, at this break-even point, there will be neither loss nor profit.

Explanation:

Format of Accounting Income statement as shown below:

Format of Contribution Margin Income statement is shown below:

As we can see in both the income statement operating income will be the same under the statements. Increased variable SG&A and same fixed expenses will have the same effect on operating income under both income statements.

Therefore, the correct answer is [option c]

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