Tutorial 7 (Week 9)

– Managerial Accounting Concepts and Principles

– Cost-volume-profit analysis

1. Horton Foods bakes and sells 1,000 dozen bagels each week to food service
operations. Among the costs are bakers' salaries, $24,000; production
management salaries, $16,000; production equipment operating costs, $32,000;
and flour and ingredient costs, $15,000. Using this information, compute: (a)
direct material cost; (b) direct labour cost and (c) overhead cost.

Baker Salaries 24,000

Management salaries 16,000
Flour and ingredient cost 15,000
Production equipment operating cost 32,000
Period costs are expenses not attached to the product

(a) Direct Material cost – 15,000

(b) Direct labour cost – 16,000 + 24,000 = 40,000
(c) Overhead cost – 32,000
- (not direct material or labour and the cost cannot be separately traced to
finished product or service)

2. Discuss how CVP analysis can be useful in planning.

Cost volume profit analysis

- It is used to determine how the change in cost and volume affect
company’s operating income and net income
- Help company determine what level of sales is necessary to reach a
breakeven or specific level of income (targeted income)

3. A company has a goal of earning $100,000 in after-tax income. The company must pay
$28,000 in income tax if it achieves the goal. The contribution margin ratio is 30%.
What dollar amount of sales must be achieved to reach the goal if fixed costs are
$64,000?

64,000 +128,000 /30%

= 192,000 / 30%
= $640,000

4. A company has total fixed costs of $200,000. Its product sells for $25 per unit and
variable costs amount to $15 per unit. The company wishes to earn an after-tax income
 of $35,000. Assume that the company has a 30% tax rate. How many units must be sold
to achieve this after-tax income level?

https://www.fool.com/knowledge-center/how-to-calculate-pre-tax-profit-with-net-income-an.aspx
Income before tax = net income / (1-0.3)
= 35,000 / 0.7
= 50,000

Contribution margin per unit = revenue – variable cost

= 25-15 = 10
200,000 + 50,000 / $10 per unit
= 250,000 / 10
= 25,000 units

5. Davison Company has fixed costs of $315,000 and a contribution margin ratio of 24%.
If sales are expected to be $1,500,000, what is the percentage of the margin of safety?

315,000 / 0.24 = $1,312,500

Margin of safety =(1,500,000 – 1,312,500)/ 1,500,000

= 0.125 = 12.5%
Danger is from getting from a profitable state to a loss situation (once you go below
break-even = make a loss)
6. A product is sold for $45 and has variable costs of $33 per unit. The total fixed costs
for the firm are $180,600. If the firm desires to earn a pretax income of $77,400, how
many units must be sold?

Unit sales = (180,600 + 77,400) / (45-33)

= 258,000 /12
= 21,500 units

BHB1009 Tut 7 (Wk 9) /T3-2017

1
 Singapore Institute of Technology
Bachelor of Hospitality Business with Honours

7. The following information describes a product expected to be

produced and sold by Pepin Corporation:

Required:
(a) Calculate the contribution margin per unit.
$32-$27 = $5
(b)Calculate the break-even point in units.
$850,000/ $5 = 170,000 units
- 170,001 is the profit, 1 unit is $5 profit

8. The hotel manager desires to know the breakdown of the electric costs between
variable and fixed categories. The following information was provided:

Month Electric Expenses Occupancy Percentage

January $6,200 62%
April 6,600 68%
August 7,200 78%
December 5,500 50%

Using the high/low method, determine the following:

a) Variable costs per 1 percent of occupancy.
High activity level – August $7,200
Low activity level – December $5,500
(7200-5500) / (78%-50%) = $60.71
b) Estimated fixed costs per month = 7200 – (60.71 * 78) = $2462.62
c) Estimated total electric expense at 62% occupancy = $2464.62 + (60.71 *
62) = $6228.64
9. The costs of a hotel at two different sales levels are as follows :

Monthly Room Sales

2,000 3,000
Payroll: Salaries (F) $15,000 $15,000
Wages (M) 40,000 60,000
Employee benefits 9,200 10,700
Supplies (V) 2,000 3,000
Utilities (F) 8,000 8,000
Other operating costs
(V) 4,000 5,000
Building rent (F) 8,000 8,000
Interest expense (F) 2,000 2,000
Insurance (F) 3,000 3,000

i) Identify each cost as fixed, variable or mixed.

- Fixed:
o Salaries
o Utilities in this case is fixed cost at it remains at $8000.
o Rent
o Interest expense
- Variable:
o Supplies
o Wages
- Mixed:
o Employee benefits
o Other Operating Costs

ii) Calculate the estimated monthly fixed costs (including the fixed
portion of mixed costs).
- Have to do high-low for employee benefits and other operating costs.
Sales level at 2000:
- 15000+2000+3000+8000+8000+6200 (Fixced cost) + 2000 = $44200
iii) Calculate the estimated variable costs per room sold.
- Wages: 20,000/1000 = $20
- Employee benefit: 1500/1000 = $1.50
- Supplies: $1000/1000 = $1
- Other operating cost: $1000/1000 = $1
- $20 + $1.50 + $1 + $1 = $23.50
 Singapore Institute of Technology
Bachelor of Hospitality Business with Honours

10(a) 100-room budget hotel usually rents out its rooms in the following proportions:

50% singles @ $80

25% doubles @ $90
25% triples @ $100

Variable costs averaged $30 per occupied room. Annual fixed costs are $1,000,000.

(i) Calculate the hotel’s average room rate (that is, the blended rate
from singles, doubles and triples) based on 60 rooms sold.

50% singles * $80 = $40

25% doubles* $90 = $22.50
25% triples * $100 = $25
Total = $87.50

50% Single 25% Double 25% Triple

Selling price $80 $90 $100
Variable cost $30 $30 $30
Unit contribution $50 $60 $70
Sales Mix ratio X 30 X 15 X 15
Weighted Contribution $1,500 $900 $1,050

(ii) Calculate the hotel’s breakeven occupancy percentage.

 Fixed cost $1,000,000 / (87.50-$30)

o = 17391 Rooms
 Convert to occupancy rate = 17391/(100*365 days) =
47.6%

(iii) Calculate the occupancy percentage that will give an operating

income (before tax) of $200,000 per year.
57.2%
 $200,000+$1,000,000/($87.50-$30) = 20,870 days
 Convert to % that will give an operating income (before tax) of
$200k per year
o 20870/(100*365) = 57.2%
 (iv) Calculate the occupancy percentage that will give an operating
income (before tax) of $180,000 per year if the average room rate
decreased by 10% and variable costs increased by 10%.
- Contribution margin change
- Variable cost increases
- = ($1,000,000 + $180,000) / (0.9*$87.50 – 1.1*$30) = 25792 rooms
- Occupancy percentage that will give an operating income (before tax
of $180,000 per year) = 25792/(100*365) = 70.7%

(b) The budget hotel has the following breakdown of its room revenue and
wages in the rooms department:

Room Revenue ($) Wage Costs ($)

January 48,900 22,700
February 48,300 22,300
March 51,300 22,500
April 48,500 22,900
May 68,100 26,500
June 92,500 37,300
July 106,700 38,400
August 88,100 32,300
September 68,500 30,300
October 60,900 25,700
November 56,500 22,500
December 54,100 26,100

Calculate the variable cost as a percentage per dollar of room revenue using the High-
Low method.

High activity level – July 106,700

Low activity level – February 48,300

Change in cost = 38,400 – 22,300 = 16,100

Change in unit = 106,700 – 48,300 = 58,400
16,100/ 58400 = $0.28

 Variable cost as apercentage of room revenue

 = $16,100/$58,400
 = $0.2757 or 27.57% per dollar of room revenue