Cost-Volume-Profit Analysis Issues and Graphics

Question 1

What is the intersection of total cost and total revenue on a graph?

Answer 1

The break-even point

Question 2

What are the major assumptions of the cost-volume-profit (CVP) model?

Answer 2

All relationships are linear; the number of units sold equals the number of units produced; fixed costs, unit variable costs, and price must behave as constants; volume is the only driver of costs and revenues; total costs can be divided into a fixed component and a component that is variable with respect to the level of output; and the model applies to operating income (i.e., the CVP model is a before-tax model).

Question 3

How de we calculate sales in units needed to achieve a target level of income?

Answer 3

Sales in Units = (Fixed Costs + Targeted Profit / Contribution Margin per unit

Question 4

What does the flat line on a cost-volume profit (CVP) graph always represent?

Answer 4

It represents fixed costs.