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Chapter 20: Q20-18RQ (page 1119)
Question: Why is the calculation to determine the target profit considered a variation of the breakeven calculation?
Answer
The target profit is considered as variation of break-even calculation because at break-even profit is zero whereas in target profit amount of profit is pre-decided.
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Question: Use the following information to complete Short Exercises S20-10 through S20-15.
Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are \(170,800 per month.
Using the Funday Park information presented, do the following tasks.
Requirements
1. Suppose Funday Park cuts its ticket price from \)70 to \(56 to increase the number of tickets sold. Compute the new breakeven point in tickets and in sales dollars.
2. Ignore the information in Requirement 1. Instead, assume that Funday Park increases the variable cost from \)42 to $56 per ticket. Compute the new breakeven point in tickets and in sales dollars.
What are the three approaches to calculating the sales required to achieve the breakeven point? Give the formula for each one.
Question: Steve and Linda Hom live in Bartlesville, Oklahoma. Two years ago, they visited Thailand. Linda, a professional chef, was impressed with the cooking methods and the spices used in Thai food. Bartlesville does not have a Thai restaurant, and the Homs are contemplating opening one. Linda would supervise the cooking, and Steve would leave his current job to be the ma卯tre d鈥�. The restaurant would serve dinner Tuesday through Saturday. Steve has noticed a restaurant for lease. The restaurant has seven tables, each of which can seat four. Tables can be moved together for a large party. Linda is planning on using each table twice each evening, and the restaurant will be open 50 weeks per year. The Homs have drawn up the following estimates:
Average revenue, including beverages and desserts \( 45 per meal Average cost of food 15 per meal Chef鈥檚 and dishwasher鈥檚 salaries 5,100 per month Rent (premises, equipment) 4,000 per month Cleaning (linen, premises) 800 per month Replacement of dishes, cutlery, glasses 300 per month Utilities, advertising, telephone 2,300 per month
Requirements
1. Compute the annual breakeven number of meals and sales revenue for the restaurant.
2. Compute the number of meals and the amount of sales revenue needed to earn operating income of \)75,600 for the year.
3. How many meals must the Homs serve each night to earn their target profit of $75,600?
4. What factors should the Homs consider before they make their decision as to whether to open the restaurant?
Determining mixed costs鈥攖he high-low method
The manager of Trusty Car Inspection reviewed the monthly operating costs for the past year. The costs ranged from \(4,300 for 1,300 inspections to \)3,900 for 900 inspections.
Requirements
1. Use the high-low method to calculate the variable cost per inspection.
2. Calculate the total fixed costs.
3. Write the equation and calculate the operating costs for 1,000 inspections.
4. Draw a graph illustrating the total cost under this plan. Label the axes, and show the costs at 900, 1,000, and 1,300 inspections.
What is a fixed cost? Give an example.
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