08 Jun Question Greg Morrison recently graduated from m
Question
Greg Morrison recently graduated from mortuary school. He is considering opening his
own funeral home. A funeral home is a high-fixed cost business, as it requires
considerable expenditures for facilities, labor, and equipment, no matter how many
families are served. Assume the annual fixed cost of operations is $800,000. Further
assume that the only significant variable cost relates to burial containers like urns and
caskets. An average casket costs $1,200. Greg’s banker has asked a variety of
questions in contemplation of providing a loan for this business.
(a)
If the average family is charged $6,000 for services and a burial container, how
many families must be served to clear the break-even point?
(b)
If the banker believes Greg will only serve 100 families during the first year in
business, how much will the business lose during its first year of operation?
(c)
If Greg believes his profits will be at least $100,000 during the first year, how
much is he anticipating for total revenue?
(d)
The banker has suggested that Greg can reduce his fixed costs by $150,000 if he
will not buy any vehicles. Greg can instead rent vehicles as needed. The variable
cost of renting is $700 per family served. Will this suggestion help Greg reach the
break-even point sooner?
(a)
Break-Even Point in Families =
(b)
(c)
Sales for a Target Income =
(d)
New Break-Even Point in Families =
Quintanilla Corporation’s controller is preparing a business plan for 20X7. The anticipated
level of business activity consists of the following key cost factors:
Total fixed costs
$2,400,000
Total variable costs
1,500,000
Total revenues
4,500,000
Quintanilla’s Bank has issued an economic advisory report suggesting that companies
should anticipate a severe economic downturn during 20X7.
(a)
Determine the level of volume reduction that Quintanilla can absorb before
becoming unprofitable.
(b)
Distinguish between committed fixed costs and discretionary fixed costs. What is
the importance of this distinction in planning for business cycles?
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