Question

Use the following information for questions #1 - 3:

An accounting student runs a hotdog concession at his college’s football games. After the first three games the following limited information is available to assess performance and make decisions about future operations:

Game #1 Game #2 Game #3 No. of Hotdogs Sold 300 290 250 Total Cost $ 1,100 $ 1,086 $ 1,030

#1.   The student knows that total costs are comprised of a variable component (meat, rolls, toppings, napkins) and a fixed component (afternoon rental of cooking cart, wages paid to self) and would like to better understand those. Calculate the following using the “High-Low Method (show work).

a.) Variable cost per hotdog sold (unit cost).

b.) Total Variable cost for Game #1

c.) Total Fixed cost for a game.

#2. Although sales have declined in the past couple of games, the student estimates that 280 hotdogs can be sold at Game #4 if he adjusts the price that he charges his customers for each hotdog.

       Calculate the following (show all work).

a.) Total Variable Cost for Game #4.

b.) Total Cost for Game #4

c.) What is the   “Contribution Margin” for Game # 4 if the price that customers pay for a hotdog is $3.50 ?

d.) Was the student’s decision to set the price of hotdogs at $3.50 a good one?   Why ?

#3 If the actual number of hotdogs the student sells at Game #4 drops below what was sold in Game #3, then:

            Variable Costs per unit would (select one) -

            a.) Increase                b.) Decrease               c.) Remain the same

            and Fixed Costs per unit would (select one) -

            a.) Increase                b.) Decrease               c.) Remain the same

Answer 1

• All working forms part of the answer
• Working For High Low Method:

	Months	Units	Cost
High Level	Game #1	300	$                                        1,100.00
Low Level	Game #3	250	$                                        1,030.00
Difference		50	$                                              70.00

Difference in Cost	$                                                                                         70.00
Difference in units	50
Variable cost per unit	$                                                                                            1.40

Working		High Level	Low Level
A	Total Cost	$                     1,100.00	$                                        1,030.00
B	Total Units	300	250
C	Variable cost per unit	$                             1.40	$                                                1.40
D = B x C	Total Variable cost	$                        420.00	$                                           350.00
E = A - D	Total Fixed Cost	$                        680.00	$                                           680.00

• Requirement #1

--Part ‘a’ Variable cost per hotdog = $ 1.40

---Part ‘b’ Total variable cost for Game #1 = 300 hotdog x $ 1.4 = $ 420

---Part ‘c’ Total Fixed Cost = $ 680

• Requirement #2

--Part ‘a’ Total variable cost for Game #4 = 280 hotdogs x $ 1.4 = $ 392

--Part ‘b’ Total cost for Game #4 = $ 392 + $ 680 = $ 1,072

--Part ‘c’: Contribution margin = Sale price – Variable cost = $ 3.5 - $ 1.4 = $ 2.1 per unit [$ 588 total contribution margin]

--Part ‘d’: No, the decision was not good. This is because the contribution margin is LESS than Fixed Cost of $ 680

• Requirement #3

Variable cost would (Option ‘c’) Remains the same, because variable cost per unit do not change with change in volume.

Fixed Cost per unit would (Option ‘a’) Increase, because total fixed cost remains the same, but when units will decrease (denominator), the fixed cost per unit will increase.