Q31E - Horngren'S Financial And Managerial Accounting

Question

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

Step-by-Step Solution

Answer

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

Step 1: 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.

Step 2 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

Step 3 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.