Final answer:
Income or loss at each level of sales can be derived from a CVP graph by calculating the difference between total revenue and total costs. Profits are depicted on the graph as the shaded area above the average cost curve.
Step-by-step explanation:
The amount of income or loss at each level of sales can indeed be derived from the total sales and total cost lines in a CVP graph. A Cost-Volume-Profit (CVP) graph is a graphical representation of the relationships between an organization's revenues, costs, and profits on the one hand and its sales volume on the other. When a business knows the selling prices, costs, and quantity it's planning to sell, it can calculate total revenue and total costs, which in turn allow for the calculation of profits.
In the provided example, at an output of 40, the firm's total revenue equals $640 (40 units * $16 per unit) and its total costs equal $580. Thus, the firm is making a profit of $60 ($640 total revenue - $580 total cost). In the CVP graph, this can be visualized as a shaded area above the average cost curve, which represents the company's economic profit.
To maximize profits, firms look for the point where the gap between total revenue and total cost is largest. If total revenue is consistently higher than total costs as the quantity increases, the firm is making a profit. In contrast, when total costs exceed total revenues at certain output levels, the firm incurs losses. The ideal quantity for maximum profit can be found on the graph where this vertical gap is widest, such as between 70 and 80 units for the raspberry farm example that was mentioned.