Interpretive Questions on the CVP Graph [LO2, LO6]

A CVP graph, as illustrated on the next page, 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. For line 3 and line 9, state whether the action will cause the line to:
Remain unc hanged.
Shift upw ard.
Shift do wnward.
Have a steeper slope (i.e., rotate upward).
Have a flatter slope (i.e., rotate downward).
Shift upw ard and have a steeper slope.
Shift upward and have a flatter slope.
Shift downward and have a steeper slope.
Shift do wnward 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 unc hanged.
Increase.
Decrease.
Probably change, but the direction is uncertain.
Treat each case independently.
x. Example. Fixed costs are increased by $20,000 each period.
Answer (see choices above): Line 3: Shift upward.
Line 9: Remain unchanged.
Break-even point: Increase.

a. The unit selling price is decreased from $30 to $27.

b. The per unit variable costs are increased from $12 to $15.

c. The total fixed costs are reduced by $40,000.

d. Five thousand fewer units are sold during the period than were budgeted.

e. Due to purchasing a robot to perform a task that was previously done by workers, fixed costs are increased by $25,000 per period, and variable costs are reduced by $8 per unit.

f. As a result of a decrease in the cost of materials, both unit variable costs and the selling price are decreased by $3.
g. Advertising costs are increased by $50,000 per period, resulting in a 10% increase in the number of units sold.
h. Due to paying salespersons a commission rather than a flat salary, fixed costs are reduced by $21,000 per period, and unit variable costs are increased by $6.