Unit 7 Managerial Accounting

According to the calculation, increasing volume at the same expensive cost will increase profit. Nonetheless, revising the freight cost and reducing its variable cost to 6% per container (1,625) from the base case (1,725), will affect the company profit positively. For example, with 10,000 containers(phase 1), the company earned a profit of $40,000/year, and with 60,000 containers(phase 3), the gain is $5,040,000 regarding the base case. After the 6% off in the variable cost, the firm could make a 3.85% phase1, 34,2% phase 2, 45,65% phase 3 of increase in its

Unit contribution = Unit Price – Unit Variable Cost = $1.80 – $1.40 = $0.40

New Contribution Margin = New Price per unit – Variable cost per unit =$8.5-$2.5 =$6

Exhibit 5 shows the breakdown of fixed costs. Exhibit 6 shows corresponding contribution margin for compensation based on a fixed fee as well as a 100% variable fee. If we assume Alltel would pay the talent 90% of ticket prices, which would vary slightly depending on talent, while maintaining the same facilities charge and service charge, the total contribution margin drops form $37 per paying customer to just over $15.While this is not ideal, the benefit is the reduction in up front expenses required. By going to 100% variable compensation Alltel no longer has a substantial fixed cost associated with paying the talent. Since Alltel only received ~10% of sales, we would suggest Alltel no longer handle the promoting, saving them another $20k in fixed advertising cost. The talent would now be in charge of the promotion. They would have the most to gain from the promotion as they would retain 90% of sales. Hiring a promoter would have its own ROI calculation and Alltel could certainly continue to offer the services but with a fixed price outsourced model or affiliate variable compensation model negotiable with each event. Alltel is not a true promoter and this would allow them to focus attention on their core business and let true promoters promote. The net result of this is a contribution margin 38% and a breakeven of 5264 paying customers. This is down from the previous breakeven of 8341. We would describe this process of

3) The breakeven analysis is likely to be more important for a fixed fee performer because the fixed costs are higher (because of the talent cost), and there is a greater risk from poor attendance at the event.

Note: You can assume that variable costs are constant so that the average of them is the variable cost relevant for a change in sales.

penetration pricing strategy. All indications are that sales will continue to grow. In response to a

Company operates in the Industrial Sector – Services, and Industry – Regional Airlines. According to the Standard Industrial Classification System (SIC), company belongs to the industry group 451: Air

As an example, if fixed costs are $100, price per unit is $10, and variable costs per unit are $6, then the break-even quantity is 25 ($100 ÷ [$10 − $6] = $100 ÷$4). When 25 units are produced and sold, each of these units will not only have covered its own marginal (variable) costs, but will have also have contributed enough in total to have covered all associated fixed costs. Beyond these 25 units, all fixed costs have been paid, and each unit contributes to profits by the excess of price over variable costs, or the contribution margin. If demand is estimated to be at least 25 units, then the company will not experience a loss. Profits will grow with each unit demanded above this 25-unit break-even level.

a service department’s costs have been allocated, costs are not reallocated back to it under

Let’s say Arrow corporate with Express, the gross total margins would decrease from 16.29% to 15.5% in optimistic scenario, and to 14% in pessimistic scenario (Exhibit 1). With expenses currently at 11%, a 22.5% decrease in Arrow’s operating profits would occur, which Express would have a difficult time making up

For instance, the concept of cost estimation which assists in estimating future expenditure as the expenditure depends on the cost of the respective activities can be applied in the setting of a budget which is simply an estimate and schedule of all costs required to be assigned to an activity. One can make an estimation of the resources required for an activity by applying the cost estimation techniques. Since there are limiting factors to each activity such as scarcity of resources for activities, the concept of constraints can be applied together with the concept of cost volume profit analysis to ensure that maximum benefits are driven from the scarce resources and the number of activities that are available. This facilitates the allocation of resources that most equitable and profitable. The theory of constraints is also applicable in the process of setting up budgets. In setting up budget one considers the amount of resources that are available and cannot therefore set a budget plan that exceeds the amount of resources that are available. This implies that the budget is constrained by the amount of

There would still be a net loss in 2006 due to the increase of break-even point, which increased from $7,505 to $8,640.

add more customers with little increases to fixed costs. The Bertrand model focuses on the

As, in this case study as the total revenue is $22,500,000 and the total events is 5000 events therefore revenue per event is $4,500 ($22,500,000/5000), therefore, the contribution margin per event is $1,900 ($4,500 - $2,600) and as the contribution margin ratio is contribution margin/revenue; therefore the contribution margin in this case is 42% ($1,900/$4,500).