A CVP graph, as illustrated below, is a useful tool for showing relationships between 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. For line 3 and line 9, state whether the action will cause the line to

• Remain unchanged.

• Shift upward.

• Shift downward.

• Have a steeper slope (i.e., rotate upward).

• Have a flatter slope (i.e., rotate downward).

• Shift upward and have a steeper slope.

• Shift upward and have a flatter slope.

• Shift downward and have a steeper slope.

• Shift downward and have a flatter slope.

In the case of the break-even point, state whether the action will cause the break-even point to

• Remain unchanged.

• Increase.

• Decrease.

• Probably change, but the direction is uncertain.

Treat each case independently.

Example: Fixed costs are decreased by $90,000 each period.

Answer (see choices above): Line 3: Shift downward.

Line 9: Remain unchanged.

Break-even point: Decrease.

a. The unit selling price increases from $100 to $110.

b. The per unit variable costs decrease from $40 to $36.

c. The total fixed costs increase by $80,000.

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

e. Due to paying salespeople a commission rather than a flat salary, fixed costs decrease by $21,000 per period, and unit variable costs increase by $6.

f. As a result of an increase in the cost of materials, both unit variable costs and the selling price increase by $6.

g. Advertising costs increase by $50,000 per period, but unfortunately the number of units sold does not change.

h. Upgrades to manufacturing equipment increase fixed costs by $40,000 per period, but variable costs per unit decrease by $2 per unit.