Question

Answer the following questions about break-even analysis.

1. Millbridge Day Care Center operates from Monday to Friday. It has fixed expenses of $18,000 per week and charges each child who attends the program $300 per week. It costs the center $30 per week for supplies and snacks for each child. How many children have to come to the Center each day for it to break even?
2. If the Center gets a rent increase of $1,000 per week, its break-even point (choose the correct answer):
   1. Increases
   2. Decreases
   3. Stays the same

3. 		Allocation Statistics
   Cost Centers	Direct Costs ($)	Purchasing: Purchase Orders (%)	Administration: Total Salaries (%)
   Support
   Purchasing	80,000	-	5
   Administration	40,000	15	-
   Mission
   Soup Kitchens	900,000	40	90
   Counseling	300,000	45	5
   Total Cost	1,320,000	100	100

   4-53

   Use the information in the table above to allocate costs to the mission centers using the direct distribution method.

   4-54

   Using the information from problem 4-53, allocate the costs using the step-down method. Compare the results with problem 4-53. Do they differ?

Answer 1

Answer :

(1)

Fixed expenses For week =  $18,000 per week

Number of Days in week = Monday to Friday = 5 days

Fixed expenses for a Day = $ 18,000 / 5 = $3,600

Charges For each child = $300 per week

Cost for supplies and snacks for each child =  $30 per week

Contribution per child per week = Charges For each child - Cost for supplies and snacks for each child

=  $300 - $ 30 = $ 270 per child

Contribution per child per day = $ 270 / 5 = $ 54

Break even Point for a Day = Fixed expenses for a Day  / Contribution per child for day

= $ 3,600 / 54 = 66.67 = 67

So, 67children have to come to the Center each day for it to break even

Answer (2)

If the Center gets a rent increase of $1,000 per week, its break-even point will be

Fixed expenses For week = $ 18,000 + 1,000 = $ 19,000

Fixed expenses for a Day = $ 19,000 / 5 = $3,800

Contribution per child per day = $ 54 per child

Break even Point for a Day = Fixed expenses for a Day  / Contribution per child

= $ 3,800 / 54 = 70.37 = 70

So, the correct option is (a)  break-even point will Increase

Answer : (3)

(4 - 53) Allocation of  costs to the mission centers using the direct distribution method.

Cost Centers	Direct Costs	Purchasing	Administration	Total
Support
Purchasing	80,000	-80,000	0	0
Administration	40,000	0	-40,000	0
Mission
Soup Kitchens	900,000	37,647	37,895	975,542
Counseling	300,000	42,353	2,105	344,458
Total Cost	1,320,000	80,000	40,000	1,320,000

Notes :

Purchasing Column Distribution on Soup Kitchen = (80,000) x [40 / (40+45)] = 80,000 x 40/85 = $ 37,647

Purchasing Column Distribution on Counselling = $ 80,000 - $ 37,647 = $ 42353

Administration Column Distribution on Soup Kitchen = (40,000) x [90 / (90 + 5)] = 40,000 x 90/95 = $ 37,895

Administration Column Distribution on Counselling = $ 40,000 - 37,895 = $2,105

(4 - 54) Allocation of  costs to the mission centers using the step-down method

Cost Centers	Direct Costs	Purchasing	Subtotal	Administration	Total
Support
Purchasing	80,000	-80,000	0	0	0
Administration	40,000	12000	52,000	-52000	0
Mission
Soup Kitchens	900,000	32000	932,000	49263	981,263
Counseling	300,000	36000	336,000	2737	338,737
Total Cost	1,320,000	0	1,320,000	0	1,320,000

Notes :

Cost of $80,000 of Purchase department has been didtributed between Administration, Soup Kitchen and Councelling in ratio of 15:40:45

Administration Column Distribution on Soup Kitchen = (52000) x [90 / (90 + 5)] = 52,000 x 90/95 = $ 49,263

Administration Column Distribution on Counselling = $ 52,000 - 49,263 = $ 2,737

Compare the results with problem 4-53

Yes, There is difference between the results of problem 4-53 from problem 4- 54.

As per problem 4-53 the total costs of Soup kitchens Department are $ 975,542 and As per problem 4-54 the total costs of Soup kitchens Department are $ 981,263.

As per problem 4-53 the total costs of Councelling Department are $344,458 and As per problem 4-54 the total costs of Councelling Department are $ 338,737.