Question

PLEASE PLEASE SOLVE BOTH QUESTIONS !!!!!!!!!!!!

Question 2.

The Preston Opera Company is putting on a production of “the Mikado”. The production will run for 12 performances. The performers and production staff do this on an amateur basis and are not paid for their work.

The production will be held in the Darebin Arts Centre, and the cost of hiring the venue is $250 per performance plus $2.50 for each ticket sold. Royalties are payable to the copyright owner at a cost of $7.50 per ticket sold. In addition, the sets and costumes will be hired at a cost of $1000 per performance or a total of $12,000 for 12 performances. Other miscellaneous production costs will be about $2,000.

After considering your advice, the Preston Opera Company tells you it can sell only 700 tickets. To reduce costs, the Company considers having only 10 performances.

Required

1) At a selling price of $30 per ticket, how many tickets will need to be sold for the production to break even if there are 12 performances?

2) Calculate the new number of ticket to be sold to reach break-even point for 10 performances.

3) Can Preston Opera Company put on the production of the Mikado without making a loss?

5+5+1 = 11 marks

Question 3

Hullabaloo produces plastic chairs in its Preston plant, which currently sell for $15 per chair. Hullabaloo has two sales staff, who are paid only on sales commission. They earn 10% of the sales they generate. Fixed costs at the Preston plant are $180,000 and variable costs (manufacturing and administrative together) amount to $9 per unit.

Profits have been down, and the CEO proposes to spend $15,000 to advertise the chairs, which should increase sales to a total of 60,000 units. The sales price will be increased to $18 to cover the cost of advertising.

Zizzy Furniture approaches Hullabaloo’s CEO and offers to purchase 10,000 chairs at a reduced price. The factory has enough spare capacity to produce these chairs without affecting normal sales. As sales staff do not make the sale, there will be no sales commission on the extra 10,000 chairs.

Required

1) Calculate the profit if the advertising is increased. Ignore the proposed Zizzy sale.

2) Calculate the minimum price Hullabaloo will need to charge for the special order sales to Zizzy to generate a profit of $30,000 on the sale

3) What other factors would Hullabaloo need to take into account before making the special sale?

Answer 1

Question 2 :

1. If there are 12 performances:

Selling price per ticket : $ 30.00

Variable costs per ticket = $ ( 2.50 + 7.50 ) = $ 10.00

Contribution margin per ticket = $ 30.00 - $ 10.00 = $ 20.00

Total fixed cost for 12 performances = 12 x $ ( 250 + 1,000) + $ 2,000 = $ 17,000.

Ticket sales for break-even = Total Fixed Cost / Contribution Margin per ticket = $ 17,000 / $ 20.00 = 850 tickets.

2. If there are 10 performances:

Total fixed cost for 10 performances = 10 x $ ( 250 + 1,000) + $ 2,000 = $ 14,500.

Ticket sales for break-even = $ 14,500 / $ 20 = 725 tickets.

3. Yes. By having only 9 performances or lower.

Question 3:

1. Profit : $ 237,000.

	$	$
Sales Revenue ( 60,000 x $ 18 )		1,080,000
Less: Variable Costs
Sales Commission ( 10 % of sales)	108,000
Manufacturing and Administrative Costs	540,000
Total Variable Costs		648,000
Contribution Margin		432,000
Fixed Costs
Advertising	15,000
Others	180,000	195,000
Net Operating Income		237,000

2. Minimum price on the special order: $ 12 per unit.

Special Order Sales	$ 120,000
Less: Variable Manufacturing and Administrative Costs	90,000
Contribution Margin	$ 30,000
Incremental Fixed Costs	0
Profit	$ 30,000

3. The most important factor to be considered is whether the company has the spare capacity to manufacture and supply the additional 10,000 units. If it does not have the excess capacity, it would mean that regular orders would be lost in order to cater to the special order. In such a situation, the contribution margin lost on the regular orders would be an opportunity cost relevant to the pricing of the special order sales. The opportunity loss would be added to the cost, thereby increasing the special order price.

Another important factor to be considered is the reaction of the regular customers once they come to know that the company follows the practice of charging different prices to different customers.