Solution
Robert answered on
Dec 27 2021
2.20 Cost categories; cost function:
a) Fixed expenses are those expenses that remain unchanged i
espective of the level of
operations/sales. In the given scenario, fixed expenses for Lounge would be those
expenses, which are not going to change with the number of meals served. The fixed
expenses are as follows:
Fixed Expenses for the Lounge
Serving personnel $30,000
Cashier $5,500
Administration $10,000
Utilities $1,500
Total $47,000
) Variable expenses are those expenses which changes with the level of operations/sales.
Here, variable expenses would be those, which changes with the number of meals served.
Variable Expenses for the Lounge
Purchases of prepared food $21,000
University surcharge $7,000
Total $28,000
Most likely cost driver for both variable costs is revenue, since both are directly related with
evenue. Cost of University surcharge is 10% of total revenue that makes it direct
proportionate to revenue.
Cost of purchasing prepared food depends upon type of meal served that would most likely
impact the selling price as well. However, in case given specifically, the cost driver for
Purchases of prepared food would be type of meal served, if price of meal served to the staff
doesn’t change with the type.
c) We would use total revenue (TR) in the cost functions instead of quantity (Q) as revenue
is the cost driver for both variable costs.
Variable cost = $28,000/$70 000 = 0.40, or 40% or revenue
Combining fixed and variable costs, the cost function is:
TC = $47,000 + 40%×Total revenue
d) The estimate of total costs given revenues of $80,000 using the cost function:
TC = $47,000 + (40%*80,000) = $79,000
Profit = Revenues – Total costs = $80,000 – $79,000 = $1,000
e) The reason behind the difference is the fixed expenses. In the original data, revenue is
$70,000, which recovers all variable expenses but the leftover amount isn’t enough to
ecover the fixed expenses which is $47,000. When revenue increases to $80,000, variable
expense increases in the same proportion, however there is no increase in fixed expense.
Since variable expense is 40% of the revenue generated, with an increase of $10,000 in
evenue, variable expense increases by $4,000 and the leftover amount is $6,000. In the
original data, the loss was of $5,000, which is $1,000 less than the leftover amount. Hence,
there is a profit of $1,000 when revenue changes to $80,000.
3.26 Direct, step-down and reciprocal methods; assign costs to departments:
a) As we can see that the building lease cost of $24 000 is the only cost that has not been
assigned yet. As far as allocation base is concerned, either number of employees or square
meters can be used. However, allocating the cost based on square-meters would be more
logical as it would use the space occupied by each department to assign the cost. For
example, administration department uses 500 square-meters out of available 2,500 square-
meters which is 20% of total space and thus, 20% of lease cost would be assigned to
administration department.
Support Operating Total
Maintenanc
e
Administration Books Other
media
Building lease allocation
Square metres 500 500 1200 300 2500
Percent 20% 20% 48% 12% 100%
Cost ($24,000 x
Percent)
$4,800 4,800 11,520 2,880
Direct costs
Salaries...