Question

Review Question

1. What is sales revenue forecasting?

2. What types of data are needed to forecast sales or revenues?

3. What is cost estimation?

4. What is the first step managers need to complete when estimating costs?

20. How does technology affect costs?

22. Identify three environmental factors that affect business decisions related to costs.

25. How does technological innovation generally affect a firm' s costs?

27. What is meant by the learning curve?

28. What are controllable costs?

Exercise and Problems

6. Mega Profits Company estimated its annual total cost function to be: Y = $150,000 + $.57 x Assuming that Y represents total cost and x equals the number of units sold, use this equation to answer the following questions:

a. What is the firm' s total fixed cost?

b. What is the firm' s variable cost per unit?

c. Compute total costs if the firm sells 100,000 units.

d. Compute total costs if the firm sells 200,000 units.

e.  If the firm' s product sells for $1.00, how many units does the firm need to sell to break even?

f.  If the firm' s product sells for $1.50, how many units does the firm need to sell to break even?

7. Morrison Hotel uses its banquet room to host parties, dinner dances, and business meetings. The hotel serves meals and provides a variety of services for each event. A local consultant analyzed recent cost data and estimated the total cost function per event to be as follows: Y = $1,000 + $9.00 x Assuming that Y represents total cost and x equals the number of guests, use this equation to answer the following questions:

a. What is the firm' s total fixed cost per event?

b. What is the firm' s variable cost per guest?

c. Compute total costs if 50 guests attend the event.

d.  Compute total costs if 100 guests attend an event.

e.  If the hotel charges $25.00 per guest, how many guests must attend for the hotel to break even at each event?

f.  If the hotel charges $28.00 per guest, how many guests must attend for the hotel to break even at each event?

g.  If the hotel charges $28.00 per guest, would you advise this hotel to host events for 50 or fewer guests? Why or why not?

3. Durango Mountain Bike Company wants to open a bicycle repair shop in a suburb of a major metropolitan area. The industry association estimates that 20 percent of bicycles are repaired by similar service companies and that the average owner spends $100 per bicycle on maintenance each year. The census and local chamber of commerce data indicate that there are 10,000 bicycles in the county. Three other competitors exist within a twenty-five-mile radius of the proposed business location. Based on a consumer survey, the owners believe that they can capture 30 percent of the market in the first year of operation. Based on these data, address the following requirements:

a.  What is the potential number of bicycles likely to be commercially repaired?

b. What is the total potential bicycle repair revenue available in the market?

c. How much revenue can Durango Mountain Bike expect to generate?

Answer 1

1 Sales revenue forecasting means revenue amount calculated by the company which it is going to achieve during the next period which can be monthly, quarterly or yearly. Forecasting means estimation and here it means estimation of revenue from sales by the company for a perticular period.

2 Data required for forecasting sales or revenue includes:

a) Last period sales figures

b) Growth rate of the sales

c) Micro and Macro economic factors

d) Technological Changes

e) Seasonal changes, Political factors, Environmental factors etc.

3 Cost estimation includes approximate calculations of the cost of a project, program, operation or for a period based on previous data available and expected changes and growth prospects.

20 Technology is changing at a very fast rate and it plays a major role in todays work environment because various process today depends on technology for eg. various processes in factories are performed by automated machines. If the factory keeps using the old machinery, it's cost for the product is going to be high in comparison to the competitors who are using the updated machinery, which will impact its business in negative way. Advancements in technology is made for improving efficiency and effectiveness in the work and simultaneously reducing the cost of operation.

22 Environmental factors which impact costs are: Technological factors, Political factors, Economic factors, Suppliers, competitors, customers etc.

6 Total Cost equation Y = $150000 + $0.57x

Fixed cost would be $150000

Variable cost would be $0.57

Total cost at 100000 units = $150000 + $0.57 X 100000 = $207000

Total Cost at 200000 units = $150000 + $0.57 X 200000 = $264000

e) If co. sells at $1.0 then breakeven units will be = (1-0.57)x = 150000 i.e x=150000/0.43 = 348837.20              So the Breakeven units are 348837 approx

f) IF S.P is $1.5 then breakeven units will be = (1.5-0.57)x = 150000 i.e x = 161290.32    So the breakeven units are 161290 approx.