Question

You are comparing a firm's CVP graph for two consecutive years. In Year 1, the firm's sales volume and total revenue resulted in a graph point that fell above the fixed-cost line, to the right of the total-cost line, and to the left of the sales line. In Year 2, the firm's sales volume and total revenue resulted in a point that fell above the fixed-cost line, to the right of the sales line, and to the left of the total-cost line. These graph results suggest that the

a. firm's financial performance was better in Year 2 than in Year 1.
b. firm failed to break even in either Year 1 or Year 2.
c. firm's financial performance was better in Year 1 than in Year 2.
d. firm turned a profit in both Year 1 and Year 2.

Answer 1

The firm's financial performance was better in Year 2 than in Year 1 since the graph point for Year 2 indicates higher total revenue, as it is to the right of the sales line, suggesting greater profitability.

Step-by-step explanation:

When comparing a firm’s cost-volume-profit (CVP) graph for two consecutive years, we can analyze the firm's financial performance. In Year 1, the firm’s sales volume and total revenue resulted in a graph point that fell above the fixed-cost line, to the right of the total-cost line, indicating profitability.

The fact that in both years the points fall above the fixed-cost line indicates the firm is covering its fixed costs. Furthermore, since the points fall to the right of the total-cost line and the sales line respectively, it suggests that the firm is covering all costs, including variable costs, and generating a profit. Therefore, the correct answer is that the firm's financial performance was better in Year 2 than in Year 1.