Question

A CVP graph such as the one shown below is a useful technique for showing relationships among an organization’s costs, volume, and profits.

Required:

1. Identify the numbered components in the CVP graph.

2. State the effect of each of the following actions on line 3, line 9, and the break-even point.

a. The unit selling price is increased from $18 to $20.

b. Unit variable expenses are decreased from $12 to $10.

c. Fixed expenses are increased by $3,000 per period.

d. Two thousand more units are sold during the period than were budgeted.

e. Due to paying salespersons a commission rather than a flat salary, fixed expenses are reduced by $8,000 per period and unit variable expenses are increased by $3.

f. Due to an increase in the cost of materials, both unit variable expenses and the selling price are increased by $2.

  
g. Advertising costs are increased by $10,000 per period, resulting in a 10% increase in the number of units sold.

h. Due to automating an operation previously done by workers, fixed expenses are increased by $12,000 per period and unit variable expenses are reduced by $4.

Answer 1

1.

(1)	Dollars
(2)	Volume of output, expressed in units, % of capacity, sales, or some other measure
(3)	Total expense line
(4)	Variable expense area
(5)	Fixed expense area
(6)	Break-even point
(7)	Loss area
(8)	Profit area
(9)	Sales line

2.

a.	Line 3:	Remain unchanged.
	Line 9:	Have a steeper slope.
	Break-even point:	Decrease.
b.	Line 3:	Have a flatter slope.
	Line 9:	Remain unchanged.
	Break-even point:	Decrease.
c.	Line 3:	Shift upward.
	Line 9:	Remain unchanged.
	Break-even point:	Increase.
d.	Line 3:	Remain unchanged.
	Line 9:	Remain unchanged.
	Break-even point:	Remain unchanged.
e.	Line 3:	Shift downward and have a steeper slope.
	Line 9:	Remain unchanged.
	Break-even point:	Probably change, but the direction is uncertain.
f.	Line 3:	Have a steeper slope.
	Line 9:	Have a steeper slope.
	Break-even point:	Remain unchanged in terms of units; increase in terms of total dollars of sales.
g.	Line 3:	Shift upward.
	Line 9:	Remain unchanged.
	Break-even point:	Increase.
h.	Line 3:	Shift upward and have a flatter slope.
	Line 9:	Remain unchanged.
	Break-even point:	Probably change, but the direction is uncertain.