Question

You are a cost management consultant and you have been asked by a small business owner for business advice. Your client owns a chain of small, local operations that support larger caterers for special events. Your client provides the tents for outside events, the soft drinks and snacks for the children of events, along with floral and other decorative arrangements. This kind of business is extremely competitive and your client would like to know how far she can lower her prices without losing money. Currently, the chain of operations has $22,500,000 of revenue from 5,000 events that they have serviced. The cost data she can provide you includes: Floral costs, $200 per event, Table arrangements, $100 per event, Soft drinks and children snacks, $500 per event, Annual allocated costs of tents and other structures, $500,000, Annual allocated costs of trucks and vehicles, $2,000,000, Annual costs related to maintaining permanent staff, $3,500,000, Wage for temporary staff (paid per event), $1,800 per event. You begin your analysis, of course, with a break-even calculation. Superior papers will: Provide an accurate solution. Provide a narrative that defines and discusses the purpose of assigning cost categories of fixed and variable costs. Provide a narrative that defines and discusses the relationship of variable costs to contribution margin. Provide a narrative that discusses the limitations of the data. Provide a narrative that speculates what data is missing from the case

Answer 1

Calculation of Break even

Variable cost

Floral	200
table	100
drink snack	500
temporary staff	1800
total	2600

variable cost = 2600*5000= 13000000

no of event = 5000

fixed cost

cost of tents = 500000

cost of trucks =2000000

staff = 3500000

total (500000+2000000+3500000) = 6000000

total cost = variable cost+ fixed cost

= 13000000+6000000= $ 19000000

break even unit = fixed cost /contribution margin p.u

contribution margin pu = sales price -variable cost p.u

contribution margin pu = 4500-2600 = 1900

breakeven unit = 6000000/1900 = 3158 unit

breakeven sales = 4500x3158 event = 14211000

2) floral cost - 200 event is depends on the volume therefore is a variable cost

table arrangement = 100 event variable cost because it depends on the volume

soft drink/anacks = 500 event variable cost as the expalanation on above

cost for tents and structures = $500000 is fixed cost because it will remain same irrecpective of volume and event

cost for trucks and vehicles = $2000000 is a fixed cost same as per the explanation given in the above

cost relating to maintaining permanent staff = $3500000 is a fixed cost

wages for temporary staff = $1800 is a variable cost because it depends upon event

3) Revenue from each event = 22500000/5000event = 4500