HOS 372 Chapter Seven – Discussion Questions and Exercises 2015

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 is not 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 sales revenue 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 cost percentage? Sales Variable cost Variable rate $6,800 $2,856 42.0% Variable Cost Formula: E7.2 If sales revenue is $48,840 and variable costs are 43% what is the dollar contribution margin? Sales Variable cost Contribution in dollars $48,840 43.0% $4,070.0 Dollar Contribution Formula: E7.3 You are asked to cater a buffet for 70 people at $18/person. Your variable cost is 68% and fixed costs are $100 per day. Calculate contribution margin in dollars and operating income. Should you accept? Customer count Price Variable cost Fixed cost 70 $18.00 68% $100.00 Revenue Variable cost at 68% Contribution margin Fixed cost Operating income $1,260 857 403 100 303 E7.5 Use the High-Low Method with the following data to determine the variable cost per guest and the total fixed costs, using both the high and the low data to confirm calculations. Maximum Minimum Difference or ? Guests 18,000 12,000 6,000 Variable Cost per Guest Labor Cost 25,500 18,000 7,500 Three steps of the High-Low Method: $1.25 Maximum Labor Cost Variable Cost for High Data Fixed Cost 25,500 22,500 3,000 Minimum Labor Cost Variable Cost for Low Data Fixed Cost 18,000 15,000 3,000 If your answer is correct the fixed cost computation must be the same for high and low E7.8 You are offered a five year lease at a fixed cost of $42,000 per year or a variable lease rate equal to 10% of revenue. Sales are projected to be $505,000. Find the indifference point and determine which lease offer you would accept. Fixed lease cost Variable lease rate Sales projection Indifference point $42,000 10% $505,000 $420,000 Which 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 the lowest cost alternative? Cost Estimated life Trade In value after 5 years Cash from sale of current machine Installation cost Training cost Annual labor cost Annual maintenance cost Annual supplies cost Total Relevant One-Time Costs Total Relevant Annual Costs Total Relevant Five Year Costs Recommendation:

HOS 372 Chapter Seven – Discussion Questions and Exercises 2015

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