Cost Behavior and Cost Volume Relationship

1. What is a cost driver? How does a cost driver influence cost behavior?

2. Explain operating leverage and why a highly leveraged company is risky?

3. Prepare and explain a cost-volume-profit graph and understand the assumptions behind it.  Also, explain how changes in fixed expenses and unit contribution margin affect break-even point.

4. Bobbie's Bagel Shop sells only coffee and bagels. Bobbie estimates thateverytime she sells one bagel, she sells four cups of coffee. The budgeted cost information for Bobbie'sproducts for 2011 follows:

Fixed Costs:

Rent on store and equipment -$5,000

Marketing and advertising cost- $2,000

1. How many cups of coffee and how many bagels must Bobbie sell in order to break even assuming the sales mix of four cups of coffee to one bagel, given previously?

2. If the sales mix is four cups of coffee to one bagel, how many units of each product does Bobbie needto sell to earn operating income before tax of $28,000?

3. Assume that Bobbie decides to add the sale of muffins to her product mix. The selling price for muffinsis $3.00 and the related variable costs are $0.75. Assuming a sales mix of three cups of coffee to twobagels to one muffin, how many units of each product does Bobbie need to sell in order to break even? Comment on the results.

4. Lifetime Escapes generates average revenue of $5,000 per person on itsfive-day package tours to wildlife parks in Kenya. The variable costs per person are as follows:

Airfare $1,400

Hotel accommodations $1,100

Meals $300

Ground transportation $100

Park tickets and other costs $800

Annual fixed costs total $520,000.

Requrement- a. Calculate the number of package tours that must be sold to break even.

b. Calculate the revenue needed to earn a target operating income of $91,000.

c. If fixed costs increase by $32,000, what decrease in variable cost per person must be achieved to maintain the breakeven point calculated in requirement 1?

5. A. Ro and Company, a manufacturer of qualityhandmade walnut bowls, has had a steady growth in sales for the past five years. However, increased competitionhas led Mr. Ro, the president, to believe that an aggressive marketing campaign will be necessarynext year to maintain the company's present growth. To prepare for next year's marketing campaign, thecompany's controller has prepared and presented Mr. Ro with the following data for the current year, 2011:

Variable cost (per bowl):

Direct materials $ 3.25

Direct manufacturing labor                                                                                  $ 8.00

Variable overhead (manufacturing, marketing, distribution, and customer service)       $2.50

Total variable cost per bowl                                                                                 $ 13.75

Fixed costs

Manufacturing $ 25,000

Marketing, distribution, and customer service                                                      $110,000

Total fixed costs $135,000

Selling price $25.00

Expected sales, 20,000 units $500,000

Income tax rate 40%

a. What is the projected net income for 2011? Required

b. What is the breakeven point in units for 2011?

c. Mr. Ro has set the revenue target for 2012 at a level of $550,000 (or 22,000 bowls). He believes an additional marketing cost of $11,250 for advertising in 2012, with all other costs remaining constant, will be necessary to attain the revenue target. What is the net income for 2012 if the additional $11,250 is spent and the revenue target is met?

d. What is the breakeven point in revenues for 2012 if the additional $11,250 is spent for advertising?

e. If the additional $11,250 is spent, what are the required 2012 revenues for 2012 net income to equal 2011 net income?

f. At a sales level of 22,000 units, what maximum amount can be spent on advertising if a 2012 net income of $60,000 is desired?