Q1) Austin's Shooters, Inc. operates paintball course where customers can come to play paintball games and stage organized matches with their friends. Their accountant, Denny Dinsdale, has made income statement (presented below) depicting their first year's operating data in contribution margin format. News is not good, given loss of $30,000. Though, Denny describes that this is the reason that presentation is in this format. That is, Austin Douglas, owner and manager of Austin's Shooters, Inc. can utilize statement to find out what will occur next year given changes in volume.
| Income Statement For the Year Ended December 31, 2004 |
| Revenue: |
|
| Admission fees (1,600 shooters) |
$80,000 |
| Supplies and Concessions |
$24,000 |
| Total Revenue ($65 per unit) |
$104,000 |
| Variable Costs: |
|
| Cost of supplies & Concessions Sold |
$14,000 |
| Electricity (purchased per KWH) |
$30,000 |
| Wages of Games Coordinators (DL) |
$40,000 |
| Liability Insurance (based on # of customers) |
$10,000 |
| Total Variable Costs |
$94,000 |
| Contribution Margin |
$10,000 |
| Fixed Costs: |
|
| Depreciation - Bldg & Fixtures |
$12,000 |
| Advertising |
$3,000 |
| Heat and Light for Bldg. |
$5,000 |
| Property Taxes |
$20,000 |
| Total Fixed Costs |
$40,000 |
| Operating Income |
$<30,000> |
After careful review, Austin tells Denny that classifications are not all correct. Austin enumerates three issues as follows:
1. Electricity cost is simply for lighting rather large area of land for play at night and is always on after sunset regardless of how many shooters are on site.
2. Though wages of games coordinators are hourly, they are needed to be present during all working hours to help make sure safety of shooters. Number of workers is adequate for up to 4,000 customers annually.
3. As liability insurance amount is based on number of shooters it does differ with volume, but it only increases for increments of every extra 5,000 shooters. Volume is expected to increase to 2,500 shooters next year, but 5,000 shooters clearly exceed relevant range of expected operations for foreseeable future.
Denny has assured Austin that information is correct and that expenses are properly categorized.
After entertaining Austin's arguments, Denny claims that he was learnt in managerial accounting that direct labor (DL) and electricity are always variable costs. This is the reason workers are paid hourly and electricity is bought as used per month (i.e., per KWH). How would you support Denny's view? How would you support Austin's view?