I am having a hard time with this can anyone help me out?
Linda Fearn asks your help in constructing a CVP
graph. Explain to Linda (a) how the break-even
point is plotted, and (b) how the level of activity and
dollar sales at the break-even point are determined.
Of course, I'd be happy to help you out. Let me explain how to construct a CVP (Cost-Volume-Profit) graph and determine the break-even point and its corresponding level of activity and dollar sales.
(a) The break-even point is plotted on a CVP graph by identifying the point at which the total revenue (sales) line intersects with the total cost line. To construct the graph, you'll need to have two lines: one representing total revenue and the other representing total cost.
- The total revenue line is typically a straight line starting from the origin (zero level of activity) and moving diagonally upward to the right. This line represents the revenue generated from sales and is calculated by multiplying the selling price per unit by the quantity sold.
- The total cost line, on the other hand, starts from a point above the origin on the y-axis (representing fixed costs) and slopes upwards to show the variable costs incurred as the level of activity increases. The equation for the total cost line is typically: Total Cost = Fixed Costs + (Variable Cost per unit × Quantity Sold).
The break-even point is the level of activity (quantity sold) at which the total revenue line intersects the total cost line. This point represents the level of sales necessary to cover all costs and results in zero profit or loss.
(b) To determine the level of activity and dollar sales at the break-even point, you can use the following steps:
1. Write down the equation for the total cost line, which I mentioned earlier: Total Cost = Fixed Costs + (Variable Cost per unit × Quantity Sold).
2. Set the total cost equal to the total revenue (break-even point condition), as at this point, there is no profit or loss. This equation will allow you to solve for the level of activity (quantity sold) at the break-even point.
3. Calculate the total dollar sales at the break-even point by multiplying the level of activity (quantity sold) by the selling price per unit. This will give you the amount of revenue needed to cover all costs.
By following these steps, you'll be able to determine the level of activity and dollar sales at the break-even point, which will further help you in constructing the CVP graph.