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Case Study

You are the Assistant Management Accountantof Ramli Burger Sdn Bhd, a food manufacturer. TheBoard of Directors is concerned that its operational

managers may not be fully aware of the importance of understanding the costs incurred by the business andthe effect that this has on their operational decisionmaking.In addition,the operational managers need to

be aware of the implications of their pricing policywhen trying to increase the volume of sales.

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Graphs of CVP relationships can be used to gaininsights into the behaviour of costs and profits.These

graph are useful as they can help managers understand

quickly what impact an increase or decrease in sales willhave on the break-even point.Also,they are able toreveal how costs change as sales volume changes.

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Q1 : What are fixed costs and what does thediagram suggest about the level of fixed costs?

Fixed costs in the diagram is called STEP-FIXEDCOSTS.

It is FIXED within a wide range of activity but willchange outside that range.

e.g : If a course increases by a large number of students, it will be necessary to add another sectionand hire another instructor.The fixed cost thenjumps to another step.

A curvilinear cost function cannot be representedwith a straight line but instead is represented with acurve that reflects either increasing or decreasingmarginal costs.

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Q2 :What are variable costs and what is thesignificance of the gradient of the total cost line in

the diagram?

Variable costs:Change in direct relation tothe volume of output

It may include to the cost of goodssold or production expenses

Total variable costs: sum of the variablecosts for the specified level of production

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Q3 : What is the relationship between thelevel of activity and the sales revenue?

When the level of activity increased, the

sales revenue alsoincreased.

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Q4 : Where is the breakeven point and how is itinterpreted?

to breakeven point, the CVP graph reveals howthe level of revenues and total cost change over

different activity level.so, this graph shows that the breakeven point is

zero, profit also equal to zero. The breakeven pointallocate at activity A.

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Any questions? :)