Management Accounting Report: CVP Analysis and Cost Restructure

This report analyzes a management accounting case study involving Crunchy Chips, a company facing profitability challenges due to limited potato harvesting seasons in Finland and competition from cheaper imports. The report begins by calculating the breakeven point for Crunchy Chips in both quantity (kg) and dollar terms, concluding that the business should cease operations due to anticipated demand falling short of the breakeven point, leading to operating losses. It then explains the importance of Cost-Volume-Profit (CVP) analysis in determining a business's breakeven point and its role in decision-making. Finally, the report provides recommendations to the business to reduce costs through computer-based systems, product diversification, and price reductions.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Author’s Note:

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MANAGEMENT ACCOUNTING
Table of Contents
Answer to Question 1......................................................................................................................2
Answer to Question 2......................................................................................................................3
Answer to Question 3......................................................................................................................3
Reference.........................................................................................................................................5

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Answer to Question 1
The case study which is provided in the question is related to the business of producing
Crunchy Chips which is operated by Jerahmel and his wife Angel in Finland. The company has
not been able to generate much profit due to the climate of Finland which allows them four
months of harvest for potatoes and there has also been imports made of chips from china which
are much cheaper than what is charged by Crunchy Chips. As the owners of the business is
uncertain whether they will be able to generate profits during the year and therefore one of the
owners is of the opinion that the business should be sold off. However, the other owner,
Jerahmel is of the view that if the business is able to at least reach the breakeven point than the
business can continue its operations (Palia, 2014). The calculations of breakeven points both in
terms of kg and Dollar is computed and shown below:
Particulars Amount
Sales Revenue p.u. $8.00
Variable Cost p.u.:
Cost of Potato $2.00
Cooking Ingredients $0.20
Packaging Cost $0.30
Labour Cost $3.00
Sales Commission $0.10
Total Variable Cost p.u. $5.60
Contribution Margin p.u. $2.40
Fixed Costs:
Administrative Expenses $1,50,000
Annual Depreciation $75,000
Total Fixed Costs $2,25,000
Break-Even Point (in kgs.) 93750
Break-Even Point in $ $7,50,000
Figure 1: (Table Showing computation of breakeven points of the business)

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Source: (Created by Author)
As per the above table which shows the breakeven for Crunchy Chips is shown as 93750
kg in terms of quantity and $ 7,50,000 in terms of dollars. The expected demand for the business
during the year is anticipated to be 50000 kg which is less than the breakeven point of the
business as computed in the above table. Therefore, the business should stop operating and sell
off the business as the costs of the business is more and even the sales which is achieved by the
business is less than the breakeven point of the company (Goldenberg et al., 2015). As the
anticipated demand is less than the breakeven point of the business, the business will not be able
to recovers its all costs and therefore will be incurring operating losses.
Answer to Question 2
CVP analysis allows business to determine the breakeven point of the business which is
very useful for the business in the decision-making process of the business. CVP analysis is used
by businesses to analyze the costs, volume of sales and profit which the business anticipates to
generate during a particular period (Klemstine & Maher, 2014). The analysis in order to be
effective needs to ensure that all the costs which are associated with production of goods are
fixed within specified level of production.
As per the case which is given in the question, CVP analysis can be effective as the costs
and volume of the production is estimated too be same as previous year and therefore breakeven
points can be accurately calculated for the business (Georgiev, 2014). The business can then
relate the anticipated demands with the breakeven thus computed and thus take important
decisions regarding the business’s operations. Any business operates for profits and if the
business is unable to generate any profits let alone incur losses than such business operations
needs to be stopped.
Answer to Question 3
To: Jerahmeal and Angel
Subject: Cost restructure strategy
Date: 17.05.18

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As per the situation of the business, the best policy which can be applied by the business
is that to reduce the costs which are related to the operations of the business. The business is
facing competition from the product which is being imported in home country. The basic
problem which the business faces is that the business is unable to increase the level of production
of potatoes for the business due to the current climatic conditions which is present in Finland
which allows the business only harvesting of potatoes crops in four months only. The business is
unable to meet the breakeven point of the business. The various recommendations which can be
suggested for making the business process of the company better are given below:
 The business needs to introduce computer-based system machines so that labourer cost of
the business is minimized and the business can become Capital intensive.
 The business needs to diversify the products which are offered by the business in the
market so that the business is able to overcome the cyclical problem related to harvesting
of potatoes which is available to the business for a period of four to five months.
 The business can reduce the prices which is charged so that the business can stay
profitable and competitive in the market.

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Reference
Georgiev, D. (2014). Application of ‘Cost-Volume-Profit’Analysis in the Hotel Industry Based
on Survey Data of High-Ranking Hotels in the North-East Region of Bulgaria.
Goldenberg, S. D., Bacelar, M., Brazier, P., Bisnauthsing, K., & Edgeworth, J. D. (2015). A cost
benefit analysis of the Luminex xTAG Gastrointestinal Pathogen Panel for detection of
infectious gastroenteritis in hospitalised patients. Journal of Infection, 70(5), 504-511.
Klemstine, C. F., & Maher, M. (2014). Management Accounting Research (RLE Accounting): A
Review and Annotated Bibliography. Routledge.
Palia, A. P. (2014). Target profit pricing with the web-based breakeven analysis
package. Developments in Business Simulation and Experiential Learning, 35.