Question 5

To create a CVP graph, you will require the following information and data:

 Fixed Costs: Fixed costs are costs that do not change independent of production or sales
volume. Examples include rent, permanent employee pay, insurance costs, and so on.
 Variable Costs: Variable expenses fluctuate according to the degree of output or sales.
Examples include raw materials, direct labour, commissions, and so forth.
 Selling price per unit: the price at which one unit of a product or service is sold.
 Projected sales volume: the number of units projected to be sold within a certain period.

With this information, you may create a CVP graph, which normally has a horizontal axis
indicating the number of products or services produced/sold and a vertical axis showing
expenses and revenues. Fixed expenses are represented by a horizontal line, variable costs by a
sloping line, and income by a line that begins at the origin and slopes upward.

After creating the CVP graph, management may examine many critical points:

1. Break-Even Point - This is the point at which total income equals total costs, yielding no
profit or loss. Management can determine how many units must be sold to break even and
whether current sales levels reach or surpass this threshold.
2. Profitability at Different Levels of Sales - The graph demonstrates how variations in sales
volume effect profitability. Management can observe the impact of increased or
decreased sales on earnings, allowing them to make educated decisions regarding sales
strategy and pricing.
3. Margin of Safety - This is the gap between actual sales and the breakeven the limit. It
reveals how far sales may decrease before the firm begins to lose money. A wider margin
of safety shows more resilience to unanticipated sales downturns.
4. Contribution Margin - This is the difference between total revenue and total variable
costs. It indicates the amount of revenue available to meet fixed expenditures while also
contributing to profits. Management can evaluate operational efficiency by examining the
contribution margin ratio.
5. Sensitivity Analysis - By modifying critical variables such as selling price, variable costs,
and fixed expenses, management may determine how changes in these parameters affect
the company's profitability and break-even point.

Overall, the CVP graph gives useful insights into a company's cost structure, revenue generation,
and profitability, allowing management to make better decisions to enhance performance and
financial health.