15 Jun Cost of Sales
Question
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:
Model A
$5,000
5 years
1,000
200
80
350
32,000
275
175
Model B
$5,500
5 years
1,200
200
120
300
32,000
300
225
Model C
$5,300
5 years
800
200
100
325
32,000
250
200
Relevant?
Chapter Seven – Problems (Pg. 324)
P7.2 Fixed costs of the banquet unit are $350/day. An event for 100 guests has a food cost of $6.50/person,
labor costs of $2.75/person and other variable costs of $1.25/person
a. Calculate the total cost per person at this event
Total Fixed Costs
Food/guest
Labor/guest
Other costs/guest
Total Variable Cost/Guest
Fixed Cost per Guest
Total Cost per Guest
$350
6.50
2.75
1.25
10.50
3.50
$14.00
b. What should the total price and total price per person be if a 20% operating income is desired?
Price Per Guest (20% margin)
Total Revenue (20% margin)
$0.80
$18
c. Customer is a regular and does not want to pay more than $13.75/person. No other event could be
booked. What are the comparative costs? Would you accept that price?.
Total Revenue
Food Cost
Variable Wage
Other Variable Costs
Fixed Costs
Total Cost
Net Loss
Recommendation:
Function
accepted at
$13.75
1,375
1,050
325
Function not
accepted
Chapter Seven – Problems (Pg. 325-326)
P7.4 Use the following quarterly income statements for a resort restaurant in this analysis:
Quarter 1
$86,400
32,800
53,600
Quarter 2
$97,000
35,900
61,100
Quarter 3
$89,400
33,100
56,300
Quarter 4
$46,400
18,100
28,300
Total
$319,200
119,900
199,300
Wages
Supplies
Advertising
Utilities
Maintenance
Insurance
Interest
Depreciation
Rent
Total Expenses
32,000
1,900
900
2,600
450
1,200
750
700
6,000
46,500
35,900
2,200
900
2,900
450
1,200
750
700
6,000
51,000
33,100
1,970
900
2,680
400
1,200
750
700
6,000
47,700
17,800
1,100
600
2,400
400
1,200
750
700
6,000
30,950
118,800
7,170
3,300
10,580
1,700
4,800
3,000
2,800
24,000
176,150
Operating Income/(Loss)
$7,100
$10,100
$8,600
($2,650)
Quarter 4
Fixed
Expenses
Quarter 4
Variable
Expenses
Total
Quarter 4
Expenses
$23,150
Revenue
Cost of Sales
Gross Margin
39.01%
60.99%
3,000
0
300
100
200
480
750
175
6,000
31.90%
2.37%
0.65%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
The owner is considering closing the restaurant during the fourth quarter to eliminate the loss. Make a recommendation about this
idea after completing the table on Quarter 4 Fixed and Variable Expenses.
Recommendation:
Chapter Seven – Problems (Pg. 327)
P7.6 Consider the following data on two motels which are both for sale.
Revenue
Variable Costs
Fixed Costs
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