Question: A CVP graph as illustrated below is a useful tool

A CVP graph, as illustrated below, is a useful tool for showing relationships between an organization’s costs, volume, and profits:
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.

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