Question

Dean runs a small coffee stand offering standard coffee (with or without milk) during the mornings on campus. The following are the costs per cup of coffee compiled for September and October 2016.

September 2016			October 2016
Number of cups sold	1,000	500
Cost of cups	$1,000	$500
Cost of coffee	$200	$100
Cost of milk and sugar	$20	$10
Rental of coffee stand	$200	$200
Rental of coffee machine	$50	$50
Salary of worker	$600	$600
Total cost	$2,070	$1,460
Cost per cup of coffee	$2.07	$2.92
Average price per cup of coffee	$3.00	$3.00
Profit per cup	$0.93	$0.08

Dean is puzzled. He thought based on September’s cost per cup of coffee he would be making $465 profit for October but instead he only made $40, almost a 96% drop in profit!

(a) Using your understanding of cost behaviour, explain why the profit per cup has decreased in October 2106 compared with September 2016. Show the relevant computations to support your answer.

(b) Dean is thinking of expanding his coffee business to 10 other university and polytechnic campuses. In order to encourage his workers (who are students from each campus) to increase sales, Dean is considering giving them a sales commission of 5 cents for every cup of coffee sold. As Dean is not able to be physically at all coffee stands in the mornings, he will have to rely on his workers to prepare and sell coffee, collect and record daily takings, and inform him when they need replenishment of coffee, cups and other ingredients. Dean expects to maintain the price per cup of coffee at $3 for at least the coming year.

(i) Give three (3) examples of management accounting information that will help Dean evaluate and choose the campuses to open his next three outlets. (Be specific and explain how such information would support his decision.)

(ii) Using your knowledge of organizational architecture (OA), evaluate if Dean’s proposed commission plan would work. Explain.

Answer 1

a) Dean Approach for calculating the profit is wrong as there is a component of fixed cost in total cost which will occur instead of how many unit she will sale. The profit is decrease because of fixed cost component is same in both but the revenue from sale has been decreased resulting in lower revenue, not half as the revenue is not directly per portae to sales.

b) i) Management Costing three examples -

1. Break even Analysis

It determines the number of cup at which the Dean will attain a no profit no loss situation. This analaysis she should do before starting this action as the new action may result in the additional loss due to comission decision. She should determine the number of cups at which she will not be in loss after considering comission expenses.

2. Cost Benfit Analysis

Cost benifit analysis is a systematic approach to estimating the strengths and weaknesses of alternatives, in this approch of management accounting Dean should compare the benifits of starting new shops at multiple location with the benifits of revenue. If there is a benifit then she should consider this decision.

3.Forecasting

Forecasting is a approch of management accounting in which Dean has to forcast all future cash inflow & outflow and calculate the persent value of the same and if there is benifit with this alternative then she should go for this otherwise not.

b) ii) Dean perposed comission plan will not work as shown in the image below if she will sold 5000 cups also she will make loss. as the fixed cost will alson increase like shop, rent of machine and others.