Which of the Following Statements Is Correct with Regard to a CVP

question 120

Multiple Choice

Which of the following statements is correct with regard to a CVP graph?

• A) A CVP graph shows the maximum possible profit.
• B) A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.
• C) A CVP graph assumes that total expense varies in direct proportion to unit sales.
• D) A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.

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Definitions:

Contribution Margin

The amount of revenue from sales that exceeds variable costs, indicating how much contributes to covering fixed costs and generating profit.

Fixed Expenses

Costs that remain constant for a given period regardless of the level of production or sales activity, such as rent and management salaries.

Break-Even

The point at which total costs and total revenues are equal, resulting in neither profit nor loss.

Margin of Safety

Margin of safety represents the difference between actual or projected sales and the break-even sales levels, measuring the buffer a company has before it incurs a loss.