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Identification of Costs

Fall, 2XXX

Part I – Identification of Costs (30 points)

 

The Blueberry House has provided you with cost information at various levels of monthly sales.

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Monthly Covers

Type of
  5000 7000

Cost
Salaries $10,000 $10,000            
Wages 5,000 7,000            
Cost of food sold 10,000 14,000            
Supplies 500 700            
Utilities 800 1,000            
Other operating costs 900 1,100            
Rent 1,000 1,000            
Depreciation 800 800            

 

Required:

  1. Identify each cost as variable, fixed or mixed in the column to the right of the above columns of numbers.
  2. What is the cost equation for utilities?

 

 

 

 

 

 

 

 

  1. Develop a single equation to estimate total costs at various levels of activity for the Blueberry House.

 

 

 

 

 

 

 

 

  1. Project total costs with monthly sales of 4500 covers.

 

 

 

 

 

Part 1 Cost Type Fixed Cost Variable Cost per cover
Q1 Salary F                                   10,000  
Wages V   1
Cost of food sold V   2
Supplies V   0.1
Utilities M                                         300 0.1
Other operating costs M                                         400 0.1
Rent F                                     1,000  
Depreciation F                                         800  
Total                       12,500                    3.30
Q2 Utilities Cost=0.10 (covers) + 300
Q3 Total Cost=12,500 + 3.30 (Covers)
Q4 TC=12500+3.30(4500)=$27,350

 

 

 

 

Part III – Multiple Choice (30 points)

 

  1. The Costless Corp. has a contract to provide meals to Mason Elementary School at $1.25 per meal. If its fixed costs are $2,000 per week and its variable costs are $.50 per meal, what is the breakeven point?  (Assume a 30% tax rate.)

 

  1. 2,667 meals
  2. 2,857 meals
  3. 3,800 meals
  4. cannot be determined

 

  1. At the Memorex Motel the CMR is 70%. If sales increase by $120,000 during the year, total costs can be expected to:

 

  1. increase by $84,000
  2. increase by less than $84,000
  3. increase by $36,000
  4. increase by less than $36,000

 

  1. Firm B has a contribution margin of $10 when rooms at its Rooms Only Inn are sold. If its breakeven point is 8,500 rooms, it generates                                        pretax earnings when                         rooms are sold.

 

  1. $500; 9,000
  2. $500; 8,000
  3. $15,000; 10,000
  4. cannot be determined

 

  1. Merit Corp. has a contract to sell meals at Bank One, Inc. Meals sell for $4.95, and the total monthly fixed costs total $8,200. If 6,000 meals are sold monthly, what is the maximum total variable costs can be for the month?  Assume a desired pretax profit of $5,000.

 

  1. $5,000
  2. $13,200
  3. $16,500
  4. $29,700
  5. none of the above.  Why?                                                               

 

 

  1. Mike’s Place, a budget motel, sells rooms for an average price of $30 and has a variable cost of 30%. If fixed costs total $4,200 for the month and 15 rooms are sold per day, what day of the month does Mike’s Place reach its breakeven point?

 

  1. 1st day
  2. 10th day
  3. 13th day
  4. 14th day
  5. 20th day
  6. It does not reach breakeven.

 

 

  1. The Buckeye Inn desires to make $10,000 in pretax profits. If the VC% is 50%, the tax rate is 50%, and the fixed costs are $110,000, what is the required level of sales?

 

  1. $200,000
  2. $240,000
  3. $260,000
  4. none of the above.  Why?                                                               

 

  1. Which of the following is not a fixed cost?

 

  1. property taxes
  2. salary (set at $25,000 for the period)
  3. depreciation
  4. operating supplies

 

  1. In January, the total fixed costs at the 250-room Vacation Hotel were $40,000. With 5,000 rooms sold in January, the average fixed cost per room sold was $8.  The forecast for February projects a 10% increase in occupancy over January.  If this increase in sales volume occurs, the total fixed costs for February would be:

 

  1. lower than in January.
  2. higher than in January.
  3. relatively the same as in January.
  4. unrelated to January’s total fixed costs.

 

  1. As occupancy decreases, hotel managers should generally expect:

 

  1. an increase in total fixed costs.
  2. a decrease in the average fixed cost per room sold.
  3. a decrease in total variable costs.
  4. an increase in variable costs per room sold.

 

 

 

  1. The current cost of food sold at the Wharf Restaurant is 35% of sales. If sales increase, the restaurant manager should generally expect an increase in:

 

  1. total fixed costs.
  2. the average fixed cost per meal sold.
  3. the total cost of food sold.
  4. the average variable cost per meal sold.

 

  1. In the analysis of purchasing alternatives, the indifference point identifies:

 

  1. the level of business activity at which an alternative is not worth pursuing.
  2. the level of cost at which an alternative is not worth pursuing.
  3. the level of business activity at which costs are the same for each alternative.
  4. the cost at which anticipated revenue is the same for each alternative.

 

  1. The owner of the River Front Restaurant is renegotiating the operation’s lease and has the option of either an annual fixed lease of $55,000 or a variable lease set at 5% of annual revenue. Which option costs less if annual revenue is expected to be $1,200,000?

 

  1. the fixed lease
  2. the variable lease
  3. both options cost the same
  4. cannot be determined from the information given

 

Part IV – Relevant Costs (25 points)

 

Paul Smith is considering replacing Jones & Smith’s present dishwasher with a new energy-efficient model.  Although the old dishwasher has a present book value of $1,000 its current market value is $2,000 and, if held for five more years, this would drop to $300.  If Paul decides not to buy the new machine, approximately $500 of repairs must be performed on the present dishwasher.  The following is a schedule of expected annual expenses for each option over the next five years.

 

  Keep Present Dishwasher Buy New Dishwasher
Maintenance $     400 $     200
Labor 12,000 12,000
Energy 800 500
Water 400 400

 

The new machine would cost $7,000 and is expected to have a salvage value of $2,000 at the end of five years.

 

Required:

 

  1. Which costs are sunk?

 

 

 

  1. Which costs are irrelevant?

 

 

 

  1. Prepare a cost analysis of each alternative. Include only relevant costs.

 

 

 

 

 

 

  1. What should Paul do?

 

 

 

Part 4
Q1 Present book value of old dishwasher
Q2 Present book value of old dishwasher, Labor, Water
Q3   Keep Buy
Salvage value-old -300 -2000
Salvage value-new   -2000
Repairs 500  
Maintenance 2000 1000
Energy 4000 2500
Cost of new   7000
Total 6200 6500
Q4 Keep old one!!!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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