If the contribution margin ratio is 0.25, targeted operating income is $17222, and targeted sales volume in dollars is $250000, then total fixed costs are:

Company Ex produces hospital equipment and the setup requirements vary from product to product. Company Ex produces its products based on customer orders and uses ABC costing. In one of its indirect cost pools, setup costs and distribution costs are pooled together. Costs in this pool are allocated using number of customer orders for the easiness of costing operations. Based on the information provided, which of the following arguments is valid?

The following information is for Company Ex:

Company Ex sells only two products, Product A and Product B.

A local accounting firm employs 20 full-time professionals. The budgeted annual compensation per employee is $43858. The average chargeable time is 500 hours per client annually. All professional labor costs are included in a single direct-cost category and are allocated to jobs on a per-hour basis.

Other costs are included in a single indirect-cost pool, allocated according to professional labor-hours. Budgeted indirect costs for the year are $787500, and the firm expects to have 90 clients during the coming year.

If ten clients are lost and the workforce stays at 20 employees, then the direct labor cost rate per hour is:

Company Ex manufactures pipes and applies manufacturing overhead costs to production at a budgeted indirect-cost rate of $18 per direct labor-hour. The following data are obtained from the accounting records for June 20x3 (amounts in US$):

Activity-based costing in restaurants

Raab, Shoemaker and Mayer (2007) developed a workable ABC model for a restaurant operation in the USA that enabled previously undistributed indi- rect operating expenses to be traced to individual menu items. Menu prices were previously deter- mined on a cost-plus basis using variable cost as the cost base. In recent years, indirect operating expenses had become a larger percentage of the total cost structure of the restaurant.

The ABC study only examined the restaurant’s dinner entrée and beverage service and its lunch menu was not included in the study. The ABC analy- sis revealed that 11 out of the 14 dinner entrées were unprofitable and were thus a major contributor to the restaurant’s negative operating profit. These results reflect the restaurant’s relatively high over- head costs which were not taken into account when determining menu prices. The authors conclude that menu ABC profitability analyses that goes beyond the simple analysis of food costs can be applied in the restaurant industry and that a restau- rant manager’s menu management decisions will differ dramatically if he or she is confronted with the differing results arising from an ABC approach.

Reference: Raab, C., Shoemaker, S. and Mayer, K.J. (2007) Activity- based costing – A more accurate way to estimate costs for a restaurant menu, International Journal of Hospitality & Tourism Administration, 8(3), 1–15. Available at dx.doi.org/10.1300/J149v08n03_01

Questions:

1. The first step in designing an ABC system is to identify the major activities in an organization. What are the major activities in a restaurant?

2. What action should an organization take when the ABC analysis identifies loss-making activities?

3. What are the factors that might prevent the restaurant industry from using ABC?

Airlines struggling to break even will make ‘less than £4 profit per passenger’

IATA research revealed that carriers would spend an estimated $212 billion (£126bn) on jet fuel over the next 12 months, representing almost 30 per cent of their total operating costs. Intense competition from low-cost carriers has seen air fares fall in real terms by 3.5 per cent this year,

with the number of passengers worldwide reaching 3.3 billion. Planes are flying fuller than ever before but lower fares mean that a higher percentage of occupied seats is needed to break even. IATA’s chief economist, Brian Pearce, said, ‘It’s remark- able that the industry is generating any profit at all.’

Reference: Catherine Eade (2014) ‘Airlines struggling to break even will make “less than £4 profit per passenger” this year’. Daily Mail, 3 June. Available at www.dailymail .co.uk/travel/article-2647105/Airlines-struggling-break -make-4-profit-passenger-year.html#ixzz3UjUsCZm4

Questions

1. Is break even a good performance monitor over the longer term?

2. How do decreasing margins affect the break-even point and margin of safety?

Which of the following costs are included in the computation of a Gross Margin?

a. Prime costs

b. Prime costs and fixed marketing costs

c. Sales commissions