Cost VolumeProfit Charts

A basic cost-volume-profit chart composed of a firm's total cost and total revenue curves is depicted in Figure 8.12. Volume of output is measured on the horizontal axis; revenue and cost are shown on the vertical axis. Fixed costs are constant regardless of the output produced and are indicated by a horizontal line. Variable costs at each output level are measured by the distance between the total cost curve and the constant fixed costs. The total revenue curve indicates the price/demand relation for the firm's product; profits or losses at each output are shown by the distance between total revenue and total cost curves.

In the example depicted in Figure 8.12, fixed costs of $60,000 are represented by a horizontal line. Variable costs for labor and materials are $1.80 per unit, so total costs rise by that amount for each additional unit of output. Total revenue based on a price of $3 per unit is a straight line through the origin. The slope of the total revenue line is steeper than that of the total cost line.

Below the breakeven point, found at the intersection of the total revenue and total cost lines, the firm suffers losses. Beyond that point, it begins to make profits. Figure 8.12 indicates a breakeven point at a sales and cost level of $150,000, which occurs at a production level of 50,000 units.

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