CPIM Practice Exam

What does the total cost curve in cost-volume-profit analysis consist of?

1. Total fixed costs only

2. Total variable costs only

3. Total fixed and variable costs per unit

4. Only variable costs multiplied by unit sales

The correct answer is: Total fixed and variable costs per unit

The total cost curve in cost-volume-profit analysis represents the overall costs incurred by a business at various levels of production and sales. This curve includes both total fixed costs and total variable costs. Total fixed costs remain constant regardless of the level of production or sales, meaning that they do not change as output varies. In contrast, total variable costs fluctuate with changes in production levels; they increase as production increases and decrease as production decreases. By combining both fixed and variable costs, the total cost curve provides a comprehensive view of a company's cost structure at different volumes of output. This holistic approach is crucial for understanding how changes in production levels affect overall costs and consequently influence profitability. This understanding allows businesses to make informed decisions regarding pricing, production levels, and budgeting, highlighting the importance of considering both fixed and variable costs together when evaluating total costs in a cost-volume-profit analysis.