group budget for key professional personnel

salal-iesl Graph the l-r3 Cost R

s:.300.000. \\:trat amount should the Exhibit 2-6 or.page 52' - ;:S, :r: --l: B,;
tire two.ppt""trt"t illustrated in
relationships on un u*rrul basis, ustg paper; simply approximate the irn',1'!:l:- i:: t]
graph. yor, ,r.'.'J not use graph
Indicate the relevant range on each l"L l::s:;'il'
graphicai relationshiPs' -," - :- ---:-
---;; -11
.d
percentages ;rrlliTil: 3I-: I:i
?42 Comparing Contribution Margin i'':rrlri;'il' (in millions):
income for "'r"'' 'r''ri; and * ' ""' ' t "i;
ttMni: :f.]i"L-ie a
Below are actual statements of operating .-,--: ,f - t-
.-i ll.' - l: I
-

uf':::r: :.' :.11- l

Procter & Gamble r!,\1"- -- i --t
Microsoft
Net sales $6a,222
Revenues $39,788
Cost of Products sold 33,r25 .'- -.-.
I !lH'r ;;-:l: -._-:
Cost of revenue
6,200
6,184 Selling, general' and : , :,- Lil
Research and develoPment 2t,a48 :[: ; : .t if
a,677 administrative exPenses ''T ,f,",
Sales and Marketing $L324e lL! "--.- - i--- :
General and administrative 4,166 Operating income r :il1

operating income $14Eq1

Procter & Gamble it is

Assume that the only variable cost
for Microsoft is "cost of revenue" and for
"cost of Products sold."
!
-'
l.Computethecontribution-marginpercentage^ofMicrosoftandthatofProcter&Gamble.Whydo
t;;J"pp*e the percentages are soitsdifferent? L-- oln *:r;^h r-nmnrrre the increase in operating
revenue by $10 million. compute
2. Suppose .u.r, .olnpuny iicreases
income for each company' --- ^-^a:^+ on operatlng
percentage helps you predict the effects 5: i' : ;1ia
3. Explain how the coitribution margin ylo *ut . in forming such a prediction?
-
_ _ _ --_:-
income of changes in sales volume. Wfrut
u.ro-piio"r ao
,r.ar,,a.3 a
;lt:::::rf
?-,** Movie Manager
MaliaMahleristhemanagerofStanford,s.traditionalsundayFlicks'Eachsunday,afilmhastwo -.1:t::::I:
r"* $3. She s^ells a maximum of 500 tick-
deliberately s"""i l rr.ni
showings. The admission;?; " " "".y including $90 for Mahler' . _.-r --[--- :-. --
.
ienial of tne uoOito,-lu* i' $:30 and labor is $435'
ets for each showing. The
a guarantee, ;";&gfrom $300 to $900, or 50oh of gross admis- 1_: :-:r-_
Mahler must pay the film distributor
LiE :-;- |L
r2%o or gross admission ar,: :-.::,J
't";".?:'lJ';r:HliJ;iillitj,l,'rn. seus refreshments; these sales average
.,5 :*_.
of 40o/o'
receipts and yield a contribution margin __ :- - - i
.r :*--::-
The guarantee to the
Sunshine.Thefilm grossed $2,250. 'lL-i
1. On June 3, Mahler screenedLittle Miss -lflii
or 50yo of gross receipts, itrti"rtltl is higher' what operating -t,
distributor was $750, "d*il;i;;
-

*tti.tt sponsored the showings? *:i

income *u, proOui"a for the Stuients'Association,
2. Recompute ihe results if the film
grossed $1'400' - -':: ::-'" 3:
..four-wall,, concept is increasingly t.iog uaopt.d by movie producers'
In this plan' the
3. The showing of a movie' As
movie,s producer pays a fixed rental-to
you evaluate
owner for,
the theaf,r say'
a "four-wall" offer?
a week's
* -:u tsasic
:..,:
a theater owneq how would rttitru:r,,i
-r :

lllllliir,rtr! ::: i,:

k-#,& Pramotion of a Rock Concert tltltttLlllli: . : r:.S.
BBTProductions'Ltd.,ispromotingarockconcertinLondon.Thebandswillreceiveaflatfeeof will collect
f7 million in cash. rne concert will be shown
wJl;i; "t closed-circuit television' BBT
managers' BBT
theater
100% of the receipts *i1 ** 30% to tht;;;;id""i local closed-circuit [300'000
fl eall^S"l] will also receive
sell 1.1 million seats at u n"t uut'ugtqii;if
"tJ
expects to l 50 for box seats to f,20
out its I 9,500 seats, ranging. from f
from the London arena (which has sold
for general ua*irrior,,?Jr;;;;;.;""."".
orl.zi-iition);'ser"*ill not share the f300,000 withthe
local Promoters.
spend for advertis-
is trying to decide what amount to
1. The general manager of BBT Productions operations' assuming sales :,'trl:t: :e::
gSi spend and stiit Ureat< even on overall -_. .;
ing. What i, tfr. *'ori "orrtO
-.

of I .1 million tickets? llr:.illrea:<.

2.IfBBTdesiresanoperatingincomeoff5o0'000,howmanyseatswouldithavetosell?Assume
total-fi'Jtosts (including f,2,000,000 in advertising)
are
that the avefase;;;;;;t;"d the .:.1":r: -:: B
f9 million.
:lillilEilur:,B' : ntroduction to Cost Behavior and Cost-Volume Relationships 83

- :,- Leverage At *ffiAy

rrrrrr
jiil{l:" had $4.6 billion in revenue and net income over $1 billion. eBay's mission is to "pro-
rrr a .l-lbal trading platform where practically anyone can trade practically anything." However,
uur
$Lrrllurlil[fl]s ias not always been as profitable for eBay. The company is one of the survivors of the tech-

lilLr uirrr, ;,:,llapse in 2001 and2002. Consider eBay's situation at that time. In the first quarter of 2001,

rllltu, -l,,.ned revenue of $ 154 million and operating expenses of $ 123 million, for an operating profit
m ,iii; :,:llion. In the first quafier of 2002, eBay reported that revenue had increased 59%, to $245
rmuLL'.lrln, :Ba)"s fixed costs were $37 million and variable costs vary with the amount of revenue.

- :rr:ule eBay's operating income for the first quarter of 2002 and its percentage increase in
,rry.:rt1ns income between 2001 and2002.
- :-r:.rrn how eBay managed to increase its income so much with only a 59oh increase in revenue.

Adding a Frmdcret
rlill{t[]lri i 3i:'.r. Pub, iocated near State University, serves as a gathering place for the university's more
ii{il [LlliuJ r-trlars. Mac sells draft beer and all brands of bottled beer at a contribution margin of $.60 a
lllilliti]jtr

rr,t"l; is
considering also selling hamburgers during selected hours. His reasons are twofold. First,
rirrrrLfinrul',,ll--:'isuould attract daytime customers. A hamburger and a beer are a quick lunch. Second, he
lllllllllllr :i.1 :,fft competition from other local bars, some of which provide more extensive menus.

,![;,r malvzed the costs as follows:

Per Month Per Hamburger

llhfrilly fixed expenses Variable expenses
filLl'mgss :' part-time cook $1,200 Rolls $.L2
i.itill'rlgr 360 Meat @ $2.80 per pound
:iirrunmtl
$1,560 (7 hamburgers per pound) .40
Other .18
Total $.70

,iiillinittuc I r.mled a selling price of $I .20 per hamburger to lure many customers. For all questions, assume
i, .ilirllLi,."0nr, nonth.

i;i are the monthly and daily break-even points, in number of hamburgers?
lu'

l r: are the monthly and daily break-even points, in dollar sales?

,Tr''

'l r.,; ie end of 2 months, Mac finds he has sold 3,600 hamburgers. What is the operating profit per
on hamburgers?
nr: L-.:rL
uu qi,rtk- :hirrks that at least 60 extra beers are sold per day because he has these hamburgers available.
Jrl:i means that 60 extra people come to the bar or that 60 buy an extra beer because they are
ur";'red by the hamburgers. How does this affect Mac's monthly operating income?
.r 4.;::r ro requirement 3. How many extra beers would have to be sold per day so that the overall
:'s:;ts of the hamburger sales on monthly operating income would be zero?

I :* Governrr?#sit Srgenizatimn
q" ulrllur:;L,*elfareagencyhasagovernmentbudgetappropriationfor20XT of$900,000.Theagency's
ililrllffri,nr :r:;ion
is to help disabled persons who are unable to hold jobs. On the average, the agency sup-
lurliLrllivrtur::s each person's income by $5,000 annually. The agency's fixed costs are $290,000. There are
tnllll firilxii: .'osts.

i r'& rnany disabled persons were helped during 20X7?

F: r ltlX8, the agency's budget appropriation has been reduced by 15%. If the agency continues
the :ame level of monetary support per person, how many disabled persons will be helped in
l. -"t3 .' Compute the percentage decline in the number of persons helped.
"t;i"nne a budget reduction of l5%, as in requirement 2. The manager of the agency has discre-
r{:r as to how much to supplement each disabled person's income. She does not want to reduce
1lrc :umber of persons served. On the average, what is the amount of the supplement that can be
g'' 3n to each person? Compute the percentage decline in the annual supplement.
 itli'lni4r€r 2: lntroduction to Cost Behavior and Cost-Volume Relationships 85

[ompare the sales cost structure of Kellogg's with that of Post. Which has the larger fixed cost?
In-.hich has the larger variable cost? Howwill this affect each company's risk? (Focus on how the
iompany's profits change with changes in volume.)
Tthat incentives does each pay system provide for the sales force?
\frght either incentive system create potential ethical dilemmas for the sales personnel? Explain.
I"ES Sales-Mix Analysis
iuu,r,ut-' -{ppendix 24. The Rocky Mountain Catering Company specializes in preparing Mexican din-
rnums-r.at it freezes and ships to restaurants in the Denver area. When a diner orders an item, the restau-
urmr leats and serves it. The budget data for 20X5 are

Product
Ghicken Tacos Beef Enchiladas
Selling price to restaurants $5 $7
Variable expenses 3 4
n Contribution margin $2 $3
Number of units 250,000 125,000
St
rg
"llflihu :r:mpany prepares the items in the same kitchens, delivers them in the same trucks, and so forth
llllllM:re. decisions about the individual products do not affect the fixed costs of $735,000.

u, ,Jcmpute the planned net income for 20X5.

L J.:mpute the break-even point in units, assuming that the company maintains its planned sales
he
Trn L
en
,il J;r:rpute the break-even point in units if the company sells only tacos and if it sells only
sncmladas.
ur 5rn6'cse the company sells 78,750 units of enchiladas and 236,250 units of tacos, for a total of
3S.
: : r . iJ00 units. Compute the net income. Compute the new break-even point with this new sales
-'d-
is mr:t- \\hat is the major lesson of this problem?

BET Hospital Patient Mix

mg $lllfrulrqr '$.rendix 2A. Hospitals measure their volume in terms of patient-days. We calculate patient-
Lilluum,* q' :nultiplying
the number of patients by the number of days that the patients are hospitalized.
$llturrmrynru*: a iarge hospital has fixed costs of $54 million per year and variable costs of $600 per patient-

rtllXiusl Daii', revenues vary among classes of patients. For simpliciry assume that there are two classes:

lli ll ilffiir_r"B) patients (S) who pay an average of $1,000 per day and (2) non-self-pay patients (G) who

unfir; lfrse of insurance companies and government agencies and who pay an average of
(es =sponsibility
$frlllllflilltl|l pr,Ja1.. Twenty percent of the patients are self-pay.

i lnpute
the break-even point in patient-days, assuming that the hospital maintains its planned
:,ipatients.
m:*.
l*. $r,rcc,r'se that the hospital achieves 225,000 patient-days but that 25%o of the patient-days were
rmf*:.4 (instead of 20%). Compute the net income. Compute the break-even point.
S 56 *ncome Taxe$ on Hotels
the s;rendix 28. The Four Winds Hotel in downtorvn Phoenix has annual fixed costs applicable to
t$liltllrtfu,

nrmrrrrnmrns :: S9.2 million for its 600-room hotel, average daily room rates of $105, and average variable
nta urrrrunmrL lr 515 for each room rented. It operates 365 days per year. The hotel is subject to an income tax

aine nrmB, rf .t _r:0.

ated
nbo - htrn, many rooms must the hotel rent to earn a net income after taxes of $720,000? Of 5360,000?
ll, ,l,lml'ute the break-even point in number of rooms rented. What percentage occupancy for the
,*nw rs needed to break even?
l the
l uas:rne rhat the volume level of rooms sold is 150,000. The manager is wondering how much
iru;:'me couid be generated by adding sales of 15,000 rooms. Compute the additional net income
rufm rares.
;sion
(am- 8&3 Tax Effects, Multiple Choice
mda lllillttutudh' ,rqpendix 28. Victor Company is a wholesaler of compact disks. The projected after-tax net
, The llllullrfrrmle :or the current year is $120,000, based on a sales volume of 200,000 CDs. Victor has been
wrlllillliiinry ie CDs at $16 each. The variable costs consist of the $10 unit purchase price and a handling