Cost-Volume-Profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating profit.
Correct Answer (C - Breakeven Occurs When the Contribution Margin Covers Fixed Costs)
Contribution Margin (CM) = Sales Revenue – Variable Costs.
The breakeven point is where total contribution margin equals total fixed costs, meaning the company has no profit or loss.
The IIA’s Practice Guide: Auditing Financial Performance supports this as the key breakeven definition.
Why Other Options Are Incorrect:
Option A (Contribution margin is the amount remaining after fixed expenses are deducted):
Incorrect because CM is calculated before fixed expenses are subtracted.
Option B (Breakeven point is the amount of units sold to cover variable costs):
Incorrect because breakeven covers fixed costs as well, not just variable costs.
Option D (Following breakeven, operating income increases by the excess of fixed costs less variable costs per unit sold):
Incorrect because operating income increases by the contribution margin per unit, not by the difference between fixed and variable costs.
IIA Practice Guide: Auditing Financial Performance – Defines breakeven analysis as when contribution margin covers fixed costs.
IIA GTAG 13: Business Performance – Discusses cost-volume-profit analysis for financial decision-making.
IIA References for Validation:Thus, C is the correct answer because breakeven occurs when the contribution margin equals fixed costs.
