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Week 5, LO 2 Demo

# Week 5, LO 2 Demo - the point representing total sales...

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Week 5 Week 5 Skill Building Demonstration Problem 2 Prepare and interpret a cost-volume-profit (CVP) graph. Learning Objective 2 A cost-volume-profit (CVP) graph highlights CVP relationships over the wide ranges of activity. In a CVP graph (sometimes called a break-even chart ), unit volume is represented on the horizontal ( X ) axis and dollars on the vertical ( Y ) axis. Definitions Preparing a CVP graph involves three steps as depicted below: 1. Draw a line parallel to the volume axis to represent total fixed expense. For Roddicks Enterprise, total fixed expense is \$600. 2. Choose some volume of sales and plot the point representing total expense (fixed and variable) at the activity level you have selected. In our example, a volume of 100 pairs of shoes has been selected. Total expense at that activity level is: After the point has been plotted, draw a line through it back to the point where the fixed expense line intersects the dollars axis. 3. Again choose some volume of unit sales and plot

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Unformatted text preview: the point representing total sales dollars at the activity level you have selected. A volume of 100 shoes has again been selected. Sales at that activity level total \$3,000 (100 pair of shoes × \$30 per pair of shoe). Draw a line through this point back to the origin. Problem The interpretation of the completed CVP graph is given below: Solution Completed CVP graph showing break even point The break-even point is where the total revenue and total expense lines intersect. As discussed earlier, when sales are below the break-even point the company suffers a loss. Note that the loss (represented by the vertical distance between the total expense and total revenue lines) gets bigger as sales decline. When sales are above the break-even point, the company earns a profit and the size of the profit (represented by the vertical distance between the total revenue and total expense lines) increases as sales increase....
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Week 5, LO 2 Demo - the point representing total sales...

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