Q. Issues to consider when making decisions?

At activity level A it can be seen from diagram that sales revenue line intersects the total cost line specifying that this is the point when company makes no loss or profit that means breakeven. Any activity beyond this point sales revenue would exceed total costs causing the company to make a profit, and anything below this activity, total costs will exceed sales revenue causing company to make losses.

After activity level B fixed costs will increases sharply due to perhaps new investment required in manufacturing process and profits will be reduced compared to just before activity level B. Operational mangers needs to consider whether sales revenue forecast is likely to hold true, if not then profits can be decreased significantly as a result of this investment.

Between activity levels B and C sales revenue line has a much higher gradient line than total costs and company is earning greater profits as it increases its activity. Profits are maximised just before point C when beyond this point sales revenue line is increasing at a slower rate when compared to total costs.

At activity level D there is another sharp increase in fixed costs and also variable costs are rising at steeper gradient to sales revenue. Operational manger must recommend to company to continue to produce activity as long as extra revenue is greater than extra cost or variable cost.