Question

APPLY THE CONCEPTS: Use the CVP graph to analyze the effects of changes in price and costs

Graph the following on your own paper. At the original position, the break-even point in sales dollars is $24,000 at 500 units. The fixed costs are $8,000.

Assume the slope of the sales line is equal to the selling price. When the two points of the sales line are at the origin and the break-even point, you see that the slope of the line is $48, which means that the selling price is $_____________.

When the two points of the total costs line are at the origin and the break-even point, you see that the slope of the line is $32.00, which means that the variable cost per unit is $__________________.

Leave the break-even point (x) at its original position. Use it as a reference point to answer the following questions. Analyze the scenarios by sliding the points on the lines to get the slope desired. Recall that the new break-even point for each scenario exists where the sales and total costs lines intersect. Compare it to the original break-even point (x). (You may want to put the lines back to their original position for each scenario.)

Each scenario should be considered independently.

1. The company sells a fixed asset and reduces fixed costs by $2,000. Variable costs remain the same, which means that the slope does not change. This will cause the break-even point to move to the left , which means that break-even point in sales dollars decreases .

2. A new supplier can provide a higher-quality product, but direct materials will increase by $4.00 per unit. If the new supplier is used, the slope of the total costs line will be $_________________, and the break-even point in sales dollars increases .

3. Market research shows that a price decrease will increase the number of units sold. A price decrease will cause the slope of the sales line to decrease . But internal analysis shows that this price decrease will cause the break-even point in sales to shift to the right , which means that more  units will need to be sold to break even.

Answer 1

Assume the slope of the sales line is equal to the selling price. When the two points of the sales line are at the origin and the break-even point, you see that the slope of the line is $48, which means that the selling price is $48 (because the slope of the sales line = the selling price) (also 24000/500 = 48)

When the two points of the total costs line are at the origin and the break-even point, you see that the slope of the line is $32.00, which means that the variable cost per unit is $32 (slope of the line is equal to the variable cost)

A new supplier can provide a higher-quality product, but direct materials will increase by $4.00 per unit. If the new supplier is used, the slope of the total costs line will be $36 (32+4) and the break-even point in sales dollars increases .