Begin by observing the CVP graph in Figure 1, where the number of units produced equals the number of units sold. This figure illustrates the basic CVP case. Total revenues are zero when output is zero, but grow linearly with each unit sold. However, total costs have a positive base even at zero output, because fixed costs will be incurred even if no units are produced. Such costs may include dedicated equipment or other components of fixed costs. It is important to remember that fixed costs include costs of every kind, including fixed sales salaries, fixed office rent, and fixed equipment depreciation of all types. Variable costs also include all types of variable costs: selling, administrative, and production. Sometimes, the focus is on production to the point where it is easy to overlook that all costs must be classified as either fixed or variable, not merely product costs.
Where the total revenue line intersects the total costs line, breakeven occurs. By drawing a vertical line from this point to the units of output (X) axis, one can determine the number of units to break even.A horizontal line drawn from the intersection to the dollars (Y) axis would reveal the total revenues and total costs at the breakeven point.
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