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Determine how each change effects the elements of the cost-volume-profit graph by placing an X in the appropriate column(s).


EFFECT

Sales Line
Fixed Cost Line
Total cost line
Breakeven point

Change

Slope Increases

Slope decreases

Shifts up

Shifts Down

Slope Increases

Slope Decreases

Increases

Decreases

Sales price per unit Increases

Sales price per unit Decreases

Variable cost per unit Increases

Variable cost per unit decreases

Total fixed cost increases

Total fixed cost decreases

Short Answer

Expert verified

The effects of the sales line, fixed cost line, total cost line, and break-even point is shown with the cross.

Step by step solution

01

Definition of break-even point

The break-even point is defined as the level of production at which the cost of production becomes equal to the revenues of the product.

02

Effect of cost-volume-profit graph


EFFECT

Sales Line
Fixed Cost Line
Total cost line
Breakeven point

Change

Slope Increases

Slope decreases

Shifts up

Shifts Down

Slope Increases

Slope Decreases

Increases

Decreases

Sales price per unit Increases

X

X

Sales price per unit Decreases

X

X

Variable cost per unit Increases

X

X

Variable cost per unit decreases

X

X

Total fixed cost increases

X

X

X

Total fixed cost decreases

X

X

X


03

Reasons for effect on the cost-volume-profit graph

Sales price per unit increases: The slop of the sales line will increase as the sales price per unit is increasing as it will increase the sales revenue. The break-even point decreases as the sales revenue increases because contribution per unit increases, which is inverse to the break-even point.

Sales price per unit decreases: The slop of the sales line will decrease as the sales price per unit decreases—the break-even point increase with the decrease in sales revenue. Contribution per unit decreases as sales price decreases, which is inverse to the break-even point.

Variable Cost per unit increases: The total cost line will increase as the total Cost includes fixed and Variable Costs. The break-even point will increase as the sales reach break-even will increase.

Variable Cost per unit decreases: The total cost line will decrease, as total Cost includes fixed Costs and variable Costs. As production increases, fixed cost per unit decreases, leading to a lower total cost relative to total production. The break-even point will decrease as variable costs decrease because the decrease in variable Costs leads to a high contribution per unit. As contribution increases break-even point decreases.

Total fixed cost increases: The fixed cost line will increase as the fixed cost increases, and the total cost line will increase as the total Cost includes fixed Costs and variable Costs. The break-even point will increase as the sales required to cover the total fixed cost increase with an increase in fixed costs.

Total fixed cost decreases: The fixed cost line will increase as the fixed cost decrease, and the total cost line will decrease as the total Cost includes fixed Costs and variable Costs. The break-even point will decrease as the sales required to cover total fixed cost decrease with fixed cost decreases.

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Most popular questions from this chapter

Mi Tierra Driving School charges \(680 per student to prepare and administer written and driving tests. Variable costs of \)408 per student include trainers’ wages, study materials, and gasoline. Annual fixed costs of \(63,920 include the training facility and fleet of cars.

Requirements

1. For each of the following independent situations, calculate the contribution margin per unit and the breakeven point in units by first referring to the original data provided:

a. Breakeven point with no change in information.

b. Decrease sales price to \)544 per student.

c. Decrease variable costs to \(340 per student.

d. Decrease fixed costs to \)53,040.

2. Compare the impact of changes in the sales price, variable costs, and fixed costs on the contribution margin per unit and the breakeven point in units.

What is a fixed cost? Give an example.

Question: Computing contribution margin, units and required sales to break even, and units to achieve target profit

Compute the missing amounts for the following table.

A B C Sales price per unit \( 200 \) 4,000 $ 5,220 Variable costs per unit 80 1,000 2,088 Total fixed costs 73,200 660,000 3,758,400 Target profit 266,760 3,000,000 3,132,000 Calculate:                          

Contribution margin per unit                          

Contribution margin ratio                          

Required units to break even                          

Required sales dollars to break even

Required units to achieve target profit

How does a contribution margin income statement differ from a traditional income statement?

Scotty’s Scooters plans to sell a standard scooter for \(55 and a chrome scooter for \)70. Scotty’s purchases the standard scooter for \(30 and the chrome scooter for \)40. Scotty’s expects to sell one standard scooter for every three chrome scooters. Scotty’s monthly fixed costs are \(23,000.

Requirements

1. How many of each type of scooter must Scotty’s Scooters sell each month to break even?

2. How many of each type of scooter must Scotty’s Scooters sell each month to earn \)25,300?

3. Suppose Scotty’s expectation to sell one standard scooter for every three chrome scooters was incorrect and for every four scooters sold two are standard scooters and two are chrome scooters. Will the breakeven point of total scooters increase or decrease? Why? (Calculation not required.)

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