Select the correct statement concerning the cost-volume-profit graph at right:
a. The point identified by “B” is the break-even point.
b. Line F is the variable cost line.
c. At point B, profits equal total costs.
d. Line E is the total cost line.
The correct answer and explanation is :
The correct answer is: a. The point identified by “B” is the break-even point.
Explanation:
A cost-volume-profit (CVP) graph visually shows the relationships among a company’s revenues, costs, and profits at different levels of sales volume. The key elements typically plotted are total revenues, total costs, fixed costs, and variable costs against units sold.
In the CVP graph:
- The break-even point is where total revenue equals total cost. At this point, the business makes zero profit — it covers all its costs but earns no profit. This critical point is usually marked clearly (often by a labeled point like “B”).
- Line E (often drawn starting from the fixed costs on the y-axis and sloping upward) represents total costs, which include both fixed costs (which do not change with volume) and variable costs (which increase with volume).
- Line F is not the variable cost line; typically, variable costs are embedded within the total cost line but are not graphed separately unless specifically indicated.
- At point B, revenues equal total costs, so there is no profit or loss — only the recovery of all costs. Profits are not equal to total costs (they are zero), but revenues are equal to total costs.
Understanding this graph helps businesses determine how many units they must sell to cover their costs and start earning a profit. It’s a visual aid for decision-making related to pricing, cost control, and sales planning. Businesses aim to operate above the break-even point where total revenues exceed total costs, thereby generating profits.
In summary, point B marks the break-even — the pivotal spot where survival (covering all expenses) transitions into profit-making for the company.