Cost Volume Profit Analysis and Decision Making

This assignment delves into a business case study focusing on 'Crunchy Chips.' It analyzes variable and fixed costs, calculates the breakeven point, and ultimately advises the company on whether to operate based on their current sales volume. The analysis relies heavily on Cost Volume Profit (CVP) principles, highlighting the importance of understanding contribution margin and its impact on profitability.

Part 1
In the present case following are the variable expenses
Potato Direct material hence variable expenses
Cooking ingredients Direct material hence variable expenses
Packaging (materials) Indirect material hence variable expenses
Labor (wages) Direct labor not permanent hence variable expenses
Administrative (inspector’s monthly
salary)
Indirect labor not permanent hence variable
expenses
Sales commissions Directly related to sales
Variable cost per unit
Potato $ 2.00
Cooking ingredients $ 0.20
Packaging (materials) $ 0.30
Labor (wages) $ 3.00
Administrative (inspector’s monthly salary) $ 1.00
Sales commissions $ 0.10
Total variable expenses $ 6.60
Revenue per unit is $8 hence contribution per unit become $8-$6.6=$1.4 per unit.
Fixed cost i.e. cost related to Annual machine and building depreciations is $75000.
Hence breakeven units (in KG’s) become $75000/1.4= 53572 Kilograms.
In the present case expected production for the year is 50000 kilograms which are below then the
breakeven level hence it is suggested to the organization to do not operate in the coming year.

Part 2
As per Cost volume profit analysis, a company should operate when sale volume of the company
becomes either equal to breakeven point or above than breakeven point. The breakeven point is a
level of sales where company’s operation would result in neither profit nor loss. Whenever
production of the company becomes higher than this level then company’s operation will result
in profits. In the present case, it is recommended to the company to operate in the year 2018 only
if when company sale become 53472 kilograms or higher. Cost volume profit analysis depends
on three assumptions i.e. fixed cost remains constant, variable cost per unit remains constant and
sale price per unit remains constant (Kryvinska, Auer, & Strauss, 2011). If all these three
assumptions hold good then results formed from cost volume analysis become always relevant
and become reasonable for the company in making a decision without actually incurring a loss.

Part 3
Memo
To: Jerahm and Angel
From: Advisor
Subject: Advise for reduction of risk of operating loss
Jerahm and Angel are facing the dilemma regarding the operation of the Crunchy chips problem
due to the importation of Chinese potato chips. Jerahm and Angel could make profits by revising
their cost structure and so that operation becomes started to give a loss. As per cost volume profit
analysis cost structure of any organization includes two types of costs one is a variable cost,
which changes due to change in volume of sale and other is a fixed cost which remains
contestant at each level of production and will not change due to increase and decrease in the
level of production (Hansen, Mowen, & Guan, 2007). In the present case, only fixed cost of the
organization is depreciation and all other costs are a variable cost. When company’s operating
level was 150000 kilograms company’s contribution margin was higher and eligible to set off
fixed cost but when company’s operating level come down to 50000 kilograms company’s
contribution margin become lower and become ineligible to set off fixed cost.
In the present case change in cost structure is not profitable because whenever company’s
production becomes lower then it is recommended to make fixed expenses as a variable expense,
but in the present case except depreciation, all expenses are already variable. The way to reduce
operating loss is to either reduce variable cost per kilogram or increase sale volume (Horngren,
2009). If it is possible for the company to reduce its cost per kilogram regarding any or all
variable cost then company become able to reduce loss because the decrease in variable cost per
unit results in an increase in contribution per unit and increase in total profit. Another way to
reduce operating loss of the organization is to increase sale volume. Increase in sale volume will
result in the same contribution per unit but the increase in the total contribution and such increase
in contribution will result in increase total profit. Hence as per cost volume profit analysis, it is
advisable to the organization to either increase sale volume of decrease variable cost per unit.
Thanks

References
Hansen, D., Mowen, M., & Guan, L. (2007). Cost management: accounting and control.
Cengage Learning.
Horngren, C. (2009). Cost accounting: A managerial emphasis, 13/e. Pearson Education India.
Kryvinska, N., Auer, L., & Strauss, C. (2011). An Approach to Extract the Business Value from
SOA Services. International Conference on Exploring Services Science , 42-52.