Seminar Activity 11.2: Group discussion – terminology
1. Using examples explain how can you tell whether a cost is a variable or a fixed cost?
2. If we say a business has high “operating leverage”, what do we mean?
3. The owner of Jinx Ltd wonders whether the nature of costs in his business allow him to use CVP analysis. Referring to the following data, and using the “relevant range” idea, advise the owner of the business: Annual sales in the last 10 years have ranged from 10 000 units to 20 000 units. Fixed costs at present amount to $150 000 but at any level of sales above 20 000 units in a year it is expected that extra premises would have to be rented. Variable costs at present are $20 per unit but at any level of sales above 20 000 units in a year overtime would have to be paid to employees.
