You are a cost management consultant and you have been asked by a small business
ID: 2335284 • Letter: Y
Question
You are a cost management consultant and you have been asked by a small business owner for business advice. Your client owns a chain of small, local operations that support larger caterers for special events. Your client provides the tents for outside events, the soft drinks and snacks for the children of events, along with floral and other decorative arrangements. This kind of business is extremely competitive and your client would like to know how far she can lower her prices without losing money. Currently, the chain of operations has $22,500,000 of revenue from 5,000 events that they have serviced. The cost data she can provide you includes: Floral costs, $200 per event, Table arrangements, $100 per event, Soft drinks and children snacks, $500 per event, Annual allocated costs of tents and other structures, $500,000, Annual allocated costs of trucks and vehicles, $2,000,000, Annual costs related to maintaining permanent staff, $3,500,000, Wage for temporary staff (paid per event), $1,800 per event. You begin your analysis, of course, with a break-even calculation. Superior papers will: Provide an accurate solution. Provide a narrative that defines and discusses the purpose of assigning cost categories of fixed and variable costs. Provide a narrative that defines and discusses the relationship of variable costs to contribution margin. Provide a narrative that discusses the limitations of the data. Provide a narrative that speculates what data is missing from the case
Explanation / Answer
Calculation of Break even
Variable cost
variable cost = 2600*5000= 13000000
no of event = 5000
fixed cost
cost of tents = 500000
cost of trucks =2000000
staff = 3500000
total (500000+2000000+3500000) = 6000000
total cost = variable cost+ fixed cost
= 13000000+6000000= $ 19000000
break even unit = fixed cost /contribution margin p.u
contribution margin pu = sales price -variable cost p.u
contribution margin pu = 4500-2600 = 1900
breakeven unit = 6000000/1900 = 3158 unit
breakeven sales = 4500x3158 event = 14211000
2) floral cost - 200 event is depends on the volume therefore is a variable cost
table arrangement = 100 event variable cost because it depends on the volume
soft drink/anacks = 500 event variable cost as the expalanation on above
cost for tents and structures = $500000 is fixed cost because it will remain same irrecpective of volume and event
cost for trucks and vehicles = $2000000 is a fixed cost same as per the explanation given in the above
cost relating to maintaining permanent staff = $3500000 is a fixed cost
wages for temporary staff = $1800 is a variable cost because it depends upon event
3) Revenue from each event = 22500000/5000event = 4500
Floral 200 table 100 drink snack 500 temporary staff 1800 total 2600Related Questions
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