# Chapter Seven – Discussion Questions (Pg. 321) 7.1 Differentiate between a direct cost and an indirect cost.

| November 9, 2018

Chapter Seven – Discussion Questions (Pg. 321)7.1 Differentiate between a direct cost and an indirect cost.7.3 Differentiate between a fixed cost and a variable cost and give an example of each that isnot in the text.7.4 Why are some costs known as semifixed or semivariable?7.7 Explain why it sometimes makes sense to sell below total cost.7.8 Define the term high operating leverage and explain why in times of increasing salesrevenue it is more profitable to have high rather than low operating leverage.Chapter Seven – Exercises (Pg. 322-323)E7.1 If sales revenue is \$6,800 and variable costs are \$2,856, what is the variable costpercentage?SalesVariable costVariable rate\$6,800\$2,85642.0%Variable Cost Formula:E7.2 If sales revenue is \$48,840 and variable costs are 43% what is the dollar contributionmargin?SalesVariable costContribution in dollars\$48,84043.0%\$4,070.0Dollar Contribution Formula:E7.3 You are asked to cater a buffet for 70 people at \$18/person. Your variable cost is 68% andfixed costs are \$100 per day. Calculate contribution margin in dollars and operating income.Should you accept?Customer countPriceVariable costFixed cost70\$18.0068%\$100.00RevenueVariable cost at 68%Contribution marginFixed costOperating income\$1,260857403100303E7.5 Use the High-Low Method with the following data to determine the variable cost per guestand the total fixed costs, using both the high and the low data to confirm calculations.MaximumMinimumDifference or ΔGuests18,00012,0006,000Variable Cost per GuestLabor Cost25,50018,0007,500Three steps of the High-Low Method:\$1.25Maximum Labor CostVariable Cost for High DataFixed Cost25,50022,5003,000Minimum Labor CostVariable Cost for Low DataFixed Cost18,00015,0003,000If your answer is correct the fixed cost computation must be the same for high and lowE7.8 You are offered a five year lease at a fixed cost of \$42,000 per year or a variable lease rateequal to 10% of revenue. Sales are projected to be \$505,000. Find the indifference point anddetermine which lease offer you would accept.Fixed lease costVariable lease rateSales projectionIndifference point\$42,00010%\$505,000\$420,000Which option would you choose and why?Indifference Point Formula:Chapter Seven – Problems (Pg. 323-324)P7.1 Using the concept of relevant costs over a five year period, which model is thelowest cost alternative?CostEstimated lifeTrade In value after 5 yearsCash from sale of current machineInstallation costTraining costAnnual labor costAnnual maintenance costAnnual supplies costTotal Relevant One-Time CostsTotal Relevant Annual CostsTotal Relevant Five Year CostsRecommendation:Model A\$5,0005 years1,0002008035032,000275175Model B\$5,5005 years1,20020012030032,000300225Model C\$5,3005 years80020010032532,000250200Relevant?Chapter Seven – Problems (Pg. 324)P7.2 Fixed costs of the banquet unit are \$350/day. An event for 100 guests has a food cost of \$6.50/person,labor costs of \$2.75/person and other variable costs of \$1.25/persona. Calculate the total cost per person at this eventTotal Fixed CostsFood/guestLabor/guestOther costs/guestTotal Variable Cost/GuestFixed Cost per GuestTotal Cost per Guest\$3506.502.751.2510.503.50\$14.00b. What should the total price and total price per person be if a 20% operating income is desired?Price Per Guest (20% margin)Total Revenue (20% margin)\$0.80\$18c. Customer is a regular and does not want to pay more than \$13.75/person. No other event could bebooked. What are the comparative costs? Would you accept that price?.Total RevenueFood CostVariable WageOther Variable CostsFixed CostsTotal CostNet LossRecommendation:Functionaccepted at\$13.751,3751,050325Function notacceptedChapter Seven – Problems (Pg. 325-326)P7.4 Use the following quarterly income statements for a resort restaurant in this analysis:Quarter 1\$86,40032,80053,600Quarter 2\$97,00035,90061,100Quarter 3\$89,40033,10056,300Quarter 4\$46,40018,10028,300Total\$319,200119,900199,300WagesSuppliesAdvertisingUtilitiesMaintenanceInsuranceInterestDepreciationRentTotal Expenses32,0001,9009002,6004501,2007507006,00046,50035,9002,2009002,9004501,2007507006,00051,00033,1001,9709002,6804001,2007507006,00047,70017,8001,1006002,4004001,2007507006,00030,950118,8007,1703,30010,5801,7004,8003,0002,80024,000176,150Operating Income/(Loss)\$7,100\$10,100\$8,600(\$2,650)Quarter 4FixedExpensesQuarter 4VariableExpensesTotalQuarter 4Expenses\$23,150RevenueCost of SalesGross Margin39.01%60.99%3,00003001002004807501756,00031.90%2.37%0.65%0.00%0.00%0.00%0.00%0.00%0.00%The owner is considering closing the restaurant during the fourth quarter to eliminate the loss. Make a recommendation about thisidea after completing the table on Quarter 4 Fixed and Variable Expenses.Recommendation:Chapter Seven – Problems (Pg. 327)P7.6 Consider the following data on two motels which are both for sale.RevenueVariable CostsFixed CostsOperating IncomePresent ConditionJacks\$550,00055.0%212,500Jocks\$550,00060.0%185,000After purchase it is believed that both restaurants could have sales increasedby 25%. Jacks could have interest expense lowered by \$12,000. Jocks couldhave variable expenses reduced to 54%. Calculate the new income statementfor each motel.After Purchase and ChangesJacksRevenueVariable CostsFixed CostsOperating Income55.0%Jocks54.0%Make a recommendation on which to buy and give any cautions you feelappropriate:Chapter Seven – Problems (Pg. 328)P7.9 Consider the following sales and wage cost information for a restaurant:JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecemberTotalRevenue11,20013,00014,90019,10022,00024,20026,30027,40023,50020,10018,20016,000\$235,900Wages5,3006,1006,2007,0009,0009,6009,70010,1008,3007,6008,0007,100\$94,000High or Low?Now identify the high and low months and conduct a High-Low analysis of the data todetermine Variable Cost % and Fixed Costs in the High and Low months.RevenueWagesMaximumMinimumDifference or ΔVariable Cost PercentageMaximum Labor CostVariable Cost for High DataFixed CostMinimum Labor CostVariable Cost for Low DataFixed CostFinally, using the calculated Variable Cost %, give the breakdown of Total Annual Wagesinto Fixed and Variable components.PercentageTotal Annual WagesVariable CostTotal Fixed CostsTotal Dollars\$94,000

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