Final answer:
A cost-volume-profit graph does show the net income or loss at every sales level, highlighting the financial implications of sales volume, pricing, and cost changes. For example, if a firm's total revenue at a certain level of sales is lower than the total costs, this would result in a loss as represented on the graph. Moreover, comparing the price to average and marginal costs provides further insight into profitability.
Step-by-step explanation:
True, a cost-volume-profit (CVP) graph indeed shows the amount of net income or loss at each level of sales. The graph illustrates the relationship between costs (both variable and fixed), volume (quantity of goods or services sold), and profit. It provides a visual interpretation of how profits are affected by changes in sales volumes, prices, and costs.
For example, let's consider a scenario. If a firm sells five units at a price of $25 per unit, this results in total revenues of $125. If the total costs associated with producing these five units are $130, the firm suffers a loss of $5. This loss is graphically represented on the CVP graph at the five units sold level. On the graph, if the total revenue line is below the total cost line, it indicates a loss.
Moreover, the relationship between the price, average cost, and marginal cost provides additional insights. If the price is lower than the average cost, the firm incurs losses. For instance, with an average cost of $26 per unit and a price of $25 per unit, for each unit sold, the firm loses $1, accumulating a total loss of $5 for five units.