Question

Question 5:

You run a school in Florida. Fixed monthly cost is $5,041.00 for rent and utilities, $6,181.00 is spent in salaries and $1,561.00 in insurance. Also every student adds up to $92.00 per month in stationary, food etc. You charge $692.00 per month from every student now.

You are considering moving the school to another neighborhood where the rent and utilities will increase to $10,886.00, salaries to $6,885.00 and insurance to $2,162.00 per month. Variable cost per student will increase up to $167.00 per month. However you can charge $1,061.00 per student. At what point will you be indifferent between your current mode of operation and the new option?

Question 8:

You run a nail salon. Fixed monthly cost is $5,325.00 for rent and utilities, $6,233.00 is spent in salaries and $1,559.00 in insurance. Also every customer requires approximately $5.00 in supplies. You charge $62.00 on average for each service.

You are considering moving the salon to an upscale neighborhood where the rent and utilities will increase to $10,789.00, salaries to $6,154.00 and insurance to $2,413.00 per month. Cost of supplies will increase to $7.00 per service. However you can now charge $143.00 per service. At what point will you be indifferent between your current location and the new loaction?

Question 9:

A Restaurant is open only for 25 days in a month.

Expenses for the restaurant include raw material for each sandwich at $6.00 per slice, $1,219.00 as monthly rental and $420.00 monthly as insurance. They consider the cost of lost sales as $4.00 per item. They are able to sell any leftover sandwiches for $3. They prepares 200.00 sandwiches and sells them at a rate of $14.00/sandwich.
Today there was a party at nearby office so the demand for sandwiches rose to 224.00. How much profit did the restaurant earn today?

Answer 1

Answer to Q 5:

First Calculate changes in contribution and changes in fixed cost due to change in location. Calculation is as follow:

Changes in Contribution
	Current Situation	Proposed
Sales per student	692	1061
Variable cost per student	92	167
Contribution per Student	600	894
Changes in Contribution	294	i.e. (894-600)

Changes in Fixed Cost
	Current Situation	Proposed
Rent	5041	10886
Salaries	6181	6885
Insurance	1561	2162
Total Fixed Cost	12783	19933
Changes in Fixed Cost	7150	i.e. (19933-12783)

Calculation of Indifference Point:

Indifference Point = Changes in Fixed Cost / Changes in contribution per student

= 7150/294

= 24.32 i.e. 25 students.

If no. of students increases by 25 in new location, then decision to move the school can be made.

Q 8:

First Calculate changes in contribution and changes in fixed cost due to change in location. Calculation is as follow:

Changes in Contribution
	Current Situation	Proposed
Sales per service	62	143
Supplies per service	5	7
Contribution per customer	57	136
Changes in Contribution	79	i.e. (136-57)

Changes in Fixed Cost
	Current Situation	Proposed
Rent	5325	10789
Salaries	6233	6154
Insurance	1559	2413
Total Fixed Cost	13117	19356
Changes in Fixed Cost	6239	i.e. (19356-13117)

Indifference Point = Changes in Fixed Cost / Changes in contribution per student

= 6239/79

= 78.97 i.e. 79 customers

If no. of customers increases by 79 in new location, then decision to move the salon can be made.

Q 9:

Each slice cost $ 6 and no. of slices required to make one sandwich is 2.Therefore per sandwich cost is $ 12.

Calculation of per day Fixed cost
	Amount
Rent	1219
Salaries	420
Total Fixed Cost	1639
Per day cost =       Total Fixed Cost / 25	65.56

Calculation of Contribution per sandwich
Sale per sandwich	14
Slice Cost	12
Contribution per Sandwich (a)	2
Total No. of Sandwich (b)	200
Total Contribution (a*b)	400

Profit Earn Today = Total Contribution - ( Per day Fixed Cost) - (cost of lost sales)

= 400 - 65.56 - (24*4)

= 400- 65.56 -96

= $ 238.44