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

Question 1:

Step 1:

Break Even Calculation:

No. of Events = 5000

REVENUE = 225,00,000 (Given)

VARIABLE COSTS / EVENT

Floral	200
Table	100
Drink/Snack	500
Temporary Staff	1800
TOTAL	2600

TOTAL VARIABLE COST = Variable Cost per Unit * No. of Events

Therefore = $2600/unit * 5000 = $ 130,00,000

FIXED COSTS

Cost of Tents	5,00,000
Cost of Trucks	20,00,000
Staff	35, 00,000
TOTAL	60,00,000

TOTAL COST = VARIABLE COST + FIXED COST

    130,00,000 + 60,00,000 = $ 190, 00,000

Step 2:

Break Even Units = Fixed Cost / Contribution Margin Per Unit

Contribution Margin Per Unit = Sales Price – Variable Cost Per Unit

                $ 4500 - $ 2600 = $ 1900 Contribution Margin Per Unit

Therefore Break Even Units = $ 60, 00, 000 / $ 1900 = 3158 Events/ Unit

Break Even Sales = $ 4500 * 3158 Events = $ 142, 11, 000

Question 2:

Allocation of Costs to Variable or Fixed Costs:

The Cost data provided includes : -

• Floral cost = 200 $ / event is variable cost since it depends on the volume. If there are no events, there are no costs
• Table arrangements = 100 $ / event, is a variable cost for the same reason as above.
• Soft drinks & snacks = 500 $ / event is a variable cost for the same reason as above.
• Annual allocated costs for tents and structures = $ 5,00,000 is a fixed cost irrespective of whether there are any events or not.
• Annual allocated costs for trucks and vehicles = $ 20,00,000 is a fixed cost irrespective of whether there are any events or not.
• Annual allocated costs relating to maintaining permanent staff = $ 35,00,000 is a fixed cost and is paid regardless of the amount of operations.
• Wage for Temperory staff (Paid per Event) = $ 1800 is a variable cost. This is paid only if there are any events.

Question 3:

Limitations of Data:

We can calculate from the data provided,

The revenue from each event = $ 4500 ( 225,00,000 / 5000 Events)

This information will be used as contribution margin per event since the data provided does not explain if this revenue pertains to the events the company mixed with other operations.