Question

You are comparing a firm's CVP graph for two consecutive years. In Year A, 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 sales line, and to the left of the total-cost line. In Year B, the firm's sales volume and total revenue resulted in a point that fell above the fixed-cost line and at the intersection of the total-cost and sales lines. What do these graph results indicate?

a. The firm's financial performance was better in Year B than in Year A.
b. The firm was more profitable in Year A than in Year B.
c. The firm turned a profit in both Year A and Year B.
d. The firm failed to break-even in either Year A or Year B.

Answer 1

The CVP graphs indicate that the company was more profitable in Year A, where the graph showed a profit, than in Year B, where the company just broke even.

Step-by-step explanation:

The correct option is B:

The firm was more profitable in Year A than in Year B since the graph point indicates a higher profit margin above the fixed-cost line. In Year B, the firm just broke even, as indicated by the intersection of the total-cost and sales lines.

In Cost-Volume-Profit (CVP) analysis, a point on the graph that falls above the fixed-cost line and to the left of the total-cost line indicates positive profits, meaning the firm's total revenue is greater than its total costs. This was the case for the firm in Year A. The sales volume and total revenue position above the fixed-cost line but to the left of the total-cost line suggest a healthy profit margin. Contrastingly, in Year B, the point where total revenue equates to total costs, precisely at their intersection, represents the break-even point. At this juncture, the firm is not making a loss, but also not gaining any profit. Thus, it is apparent that Year A was more profitable for the firm than Year B.

Additionally, the CVP graph's depiction of Year B's sales volume and total revenue coinciding with the break-even point reveals that there was no excess profit, contrasting with Year A's economical profits illustrated by the point above the fixed-cost and total-cost lines. This visual comparison underscores the comparative profitability between the two fiscal periods.