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. P Reference 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. 9. Advertising costs are increased by $10,000 per period, resulting in a 10% increase in the number of units sold.

Answer 1

	1. Identifucation of Nos.
1	$ value --denotes both costs & sale value
2	No.of Unitsproduced/ sold
3	Total costs --line representing total costs(fixed +Variable)against each no.of units sold
4	Total variable cost against that no.of units on the X-axis
5	Total fixed cost
6	Break-even point --no.of units for which total cost=total sales
7	Loss area-ie. Area below the break-even point , where total costs are more than the total revenues made
8	Profit area--Area above the break-even point , where total revenues are more than the total costs incurred.
9	Total sales-- line representing total sale value

2…

a. Unit selling price increased from $ 18 to $ 20

line-3,ie. Total costs - no effect

line-9-ie. Total sales--will shift to the left.

Pt.6. Break-even point--also will shift to the upper left--ie. Breaking even with lesser no.of unit sold.BEP decreases.

b.Unit variable expe. decreased from $ 12 to $10

line-3,ie. Total costs - will shift to the right--indicating lower total costs

line-9-ie. Total sales--no effect

Pt.6. Break-even point--also will shift to lower right--ie. Breaking even with lesser no.of unit sold.BEP decreases.

c. Fixed exp. Increased by $ 3000 per period

line-3,ie. Total costs - will shift to the left--indicating highertotal costs

line-9-ie. Total sales--no effect

Pt.6. Break-even point--also will shift to upper left--ie. Breaking even with more no.of unit sold--BEP increases.

d.2000 more units sold than budgeted

line-3,ie. Total costs - will shift upward --indicating higher total costs

line-9-ie. Total sales--will shift upward --meaning higher total revenues

Pt.6. Break-even point--No effect

e.Increasing variable commission, reducing fixed expenses

line-3,ie. Total costs line will shift upward to the left due to increased variable cost

line-9-ie. Total sales--no effect

Pt.6. Break-even point--TC line will meet the TR line at higher no.of units --so BEP increases (more variable cost, less contribution)

f.Both selling price & materials are increased by $ 2

line-3,ie. Total costs line will shift upward to the left due to increased variable cost

line-9-ie. Total sales--will also move upwards by the same slope as cost

Pt.6. Break-even point--no effect--remains the same --so BEP is same--increase in cost compensated by the same level of increase in revenue

g.Advg. Costs increased by $ 10000 resulting in 10% increase in no.of units sold

line-3,ie. Total costs line will shift upward to the left due to increased fixed/period cost

line-9-ie. Total sales--will also move upwards due to increased sales volume.

Pt.6. Break-even point--shifts upward, meaning more no .of units sold to cover the increased fixed expenses.