Music for All Occasions is a service business that provides musical groups to pl

Question

Music for All Occasions is a service business that provides musical groups to play at parties, wedding receptions, etc. Customers can choose between a big swing-style band, a small jazz combo, or a rock band. The price customers must pay depends on the style of band they choose and the number of hours they want the band to perform.

Big Band

Jazz Combo

Rock Band

Number of Musicians

15

4

5

Price per Hour

$650

$185

$200

The musicians in all groups are paid $20 per hour. The company employs one person who sets up the equipment needed by the bands before each job (or “gig”) and dismantles the equipment at the end of the job. This person is paid $125 to set up and tear down each job. The company’s yearly costs are $5,000 for advertising, $7,000 for equipment rental and depreciation, and $9,500 for other administrative costs.

During 2014, Music for All Occasions performed the following jobs:

Big Band

Jazz Combo

Rock Band

Number of Jobs

32

97

88

Total Number of Hours for All Jobs

105

410

370

At the beginning of 2015, competition forced the owner of Music for All Occasions to change the price for the Big Band to $575 per hour and reduce the number of musicians in the group to 12. The wage rate for musicians in the Big Band was also raised to $25 per hour. Based on the former price of $650 per hour, the owner estimated the Big Band would perform 35 jobs in 2015 totaling 115 hours. However, with the reduced price, the Big Band actually played 50 jobs in 2015 for a total of 165 hours.

Perform the following analysis for Music for All Occasions:

a) Determine the cost behavior (fixed or variable) for all of the company’s costs and identify the activity base for the variable costs.

b) Prepare a report showing contribution margin and contribution margin ratio by type of band for 2014.

c) Prepare a variable costing income statement for the entire company for 2014. Be sure your income statement shows both contribution margin and income from operations.

d) Prepare a contribution margin analysis report for only the Big Band for 2015 comparing planned performance under the old price structure ($650 per hour with 15 musicians) and the actual performance under the reduced price structure ($575 per hour with 12 musicians).

Big Band

Jazz Combo

Rock Band

Number of Musicians

15

4

5

Price per Hour

$650

$185

$200

Explanation / Answer

a Cost Behaviour Nature of cost Activity base if variable cost Musician Charge Variable Per hour per musician Equipment installing dismantling Charge Variable Per gig. Yearly Advertisisng Charge Fixed   Equipment rental and depreciation Fixed   Other Admiin costs Fixed   b Contribution Margin & CM ratio 2014. Big Band Jazz Combo Rock Band Number of Musicians 15 4 5 Price per Hour $650 $185 $200 Number of Jobs 32 97 88 Total Number of Hours for All Jobs 105 410 370 Rate per musician per hour                    20                  20                      20 Revenue              68,250          75,850             74,000 Musician Charges              31,500          32,800             37,000 Equipment installing dismantling Charge@$125 /job              4,000          12,125             11,000 Total Variable cost            35,500          44,925             48,000 Contribution Margin              32,750          30,925             26,000 Contribution Margin Ratio=Contribution margin/Sales 47.99% 40.77% 35.14% c Variable costing Income Statement Big Band Jazz Combo Rock Band Total Number of Musicians 15 4 5 Price per Hour $650 $185 $200 Number of Jobs 32 97 88 Total Number of Hours for All Jobs 105 410 370 Rate per musician per hour                    20                  20                      20 Revenue              68,250          75,850             74,000               218,100 Musician Charges              31,500          32,800             37,000               101,300 Equipment installing dismantling Charge@$125 /job              4,000          12,125             11,000                 27,125 Total Variable cost            35,500          44,925             48,000               128,425 Contribution Margin              32,750          30,925             26,000                 89,675 Less Fixed costs Yearly Advertisisng Charge                   5,000 Equipment rental and depreciation                   7,000 Other Admiin costs                   9,500 Total Fixed costs                 21,500 Net Operating Income                 68,175 d Contribution Margin Analysis Big Band 2015 Old price structure   Reduced Price structure Number of Musicians 15 12 Price per Hour $650 $575 Number of Jobs 35 50 Total Number of Hours for All Jobs 115 165 Rate per musician per hour                    20                  25 Revenue              74,750          94,875 Musician Charges              34,500          49,500 Equipment installing dismantling Charge@$125 /job              4,375            6,250 Total Variable cost            38,875          55,750 Contribution Margin              35,875          39,125

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