Final answer:
The amount of income or loss at each level of sales can indeed be determined from the total sales and total cost lines in a CVP graph, which makes the statement true. The correct option is a.
Step-by-step explanation:
The statement that the amount of income or loss at each level of sales can be derived from the total sales and total cost lines in a CVP graph is true. The CVP graph visually represents the relationships between total revenues, total costs, and profits at different levels of output and sales. For example, if we take a quantity of five units at a price of $25 per unit, the total revenue will be $125. If the total cost of producing these five units is $130, the firm will experience a loss of $5. Similarly, if the firm increases the price, the total revenue will also increase, potentially leading to a profit if it exceeds total costs. Conversely, a drop in price can lead to total revenue being less than total costs, resulting in losses. A profit-maximizing firm will seek to minimize losses by choosing the output level where the difference between total revenue and total costs is smallest.
In a scenario where the firm is producing 40 units at a price of $16, with total revenue at $640 and total cost at $580, the firm makes economic profits of $60. This calculation underscores the importance of understanding the interplay between price, cost, and output in profit maximization and determining the point of break-even or loss in a business.
The correct option is a.