Seminar 3 Cost Accounting (2016)Ejercicio Inglés
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SEMINAR 3 COST ACCOUNTING
1. Break-even chart with increase in fixed costs
A local authority, whose area includes a holiday resort situated on the east coast,
operates, for 30 weeks each year, a holiday home which is let to visiting parties of
children in care from other authorities. The children are accompanied by their own
house mothers who supervise them throughout their holiday. From six to fifteen
guests are accepted on terms of £100 per person per week. No differential charges
exist for adults and children. Weekly costs incurred by the host authority are:
($ per guest)
Electricity for heating and cooking 3
Domestic Expenses (Laundry, cleaning, etc…) 5
Use of Minibus 10
Seasonal staff supervise and carry out the necessary duties at the home at a cost of
£11 000 for the 30- week period. This provides staffing sufficient for six to ten guests
per week but if eleven or more guests are to be accommodated, additional staff at a
total cost of £200 per week are engaged for the whole of the 30-week period. Rent,
including rates for the property, is £4000 per annum and the garden of the home is
maintained by the council’s recreation department which charges a nominal fee of
£1000 per annum.
a) tabulate the appropriate figures in such a way as to show the break-even point(s) and to comment on your figures; b) draw, on the graph paper provided, a chart to illustrate your answer to a) above.
SEMINAR 3 COST ACCOUNTING The graph clearly illustrates the evolution of the costs. Thus, seeing that from 11 onwards the breakeven units must be higher to compensate for the increase in the fixed costs.
2. Choosing Between Compensation plans, Operating leverage Marston Corporation manufactures pharmaceutical products that are sold through a network of external sales agents. The agents are paid a commission of 18% of revenues. Marston is considering replacing the sales agents with its own salespeople, who would be paid a commission of 10% of revenues and total salaries of $2,080,000.
The income statement for the year ending December 31, 2011, under the two scenarios is shown here.
a) Calculate Marston’s 2011 contribution margin percentage, breakeven revenues, and degree of operating leverage under the two scenarios.
CM: Rev - (COGS_var + Mar_var) --- OI: CM - (COGS_fix + Mar_fix) Contribution %: CM/Rev --- Degree of op. Lev: CM/OI Bre point: Fixed costs (COGS_fix + Mar_fix)/ CM b) Describe the advantages and disadvantages of each type of sales alternative.
We can identify clearly two main advantages which are: SEMINAR 3 COST ACCOUNTING -Sales Agents are cheaper in terms of fixed costs, which leaves us to a sooner Breakeven point (good alternative for a pessimistic point of view) -Own Sales Force is more attractive in terms of contribution, due to its lower variable costs.
But the bad points are just that Sales Agents are more costly in variable terms and Own Sales Force is worse in fixed costs. Anyway, the Breakeven point in Own Sales Force is higher, but it is true that the profit is higher in terms of contribution.
c) In 2012, Marston uses its own salespeople, who demand a 15% commission. If all other cost behavior patterns are unchanged, how much revenue must the salespeople generate in order to earn the same operating income as in 2011? They should generate $27,529,412 of sales, in order to get the same OI as the Sales Agents.