Question

Rita Jekyll operates a sales booth in computer software trade shows, selling an accounting software package, Abacus. She purchases the package from a software company for $165 each. Booth space at the convention hall costs $13,000 per show.

Required

a. Sales at past trade shows have ranged between 400 and 600 software packages per show. Determine the average cost of sales per unit if Ms. Jekyll sells 400, 450, 500, 550, or 600 units of Abacus at a trade show. Use the following chart to organize your answer. Is the cost of booth space fixed or variable?

b. If Ms. Jekyll wants to earn a $50 profit on each package of software she sells at a trade show, what price must she charge at sales volumes of 400, 450, 500, 550, or 600 units?

c. Record the total cost of booth space if Ms. Jekyll attends three, four, five, six, or seven trade shows. Is the cost of booth space fixed or variable relative to the number of shows attended?

d. Ms. Jekyll provides decorative shopping bags to customers who purchase software packages. Some customers take the bags; others do not. Some customers stuff more than one software package into a single bag. The number of bags varies in relation to the number of units sold, but the relationship is not proportional. Assume that Ms. Jekyll uses $30 of bags for every 58 software packages sold. What is the additional cost per unit sold? Is the cost fixed or variable?

Answer 1

Solution a:

Computation of average cost of sales per unit
Particulars	400 units	450 units	500 units	550 units	600 units
Purchase cost ($165*nos of units)	66000	74250	82500	90750	99000
Booth space hall cost	$13,000.00	$13,000.00	$13,000.00	$13,000.00	$13,000.00
Total cost	$79,000.00	$87,250.00	$95,500.00	$103,750.00	$112,000.00
Nos of software sold	$400.00	$450.00	$500.00	$550.00	$600.00
Average cost of sales per unit	$197.50	$193.89	$191.00	$188.64	$186.67

Cost of booth space is a fixed cost irrespective of number of software sold.

Solution b:

Computation of average cost of sales per unit
Particulars	400 units	450 units	500 units	550 units	600 units
Average cost of sales per unit	$197.50	$193.89	$191.00	$188.64	$186.67
Target profit per software	$50.00	$50.00	$50.00	$50.00	$50.00
Price to be charge per software	$247.50	$243.89	$241.00	$238.64	$236.67

Solution c:

Computation of Total cost of booth space
Particulars	3 shows	4 shows	5 shows	6 shows	7 shows
Cost per booth space	$13,000.00	$13,000.00	$13,000.00	$13,000.00	$13,000.00
Nos of booth space	3	4	5	6	7
Total cost of booth space	$39,000.00	$52,000.00	$65,000.00	$78,000.00	$91,000.00

Cost of booth space is variable relative to the number of shows attended.

Solution d:

Cost fo decorative bags per 58 software = $30

Hence additional cost per unit sold = $30 /58 = $0.52 per unit

The cost of decorative bag is batch level cost that varies with number of batches. It is also to be called as step fixed cost.