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Demonstration Problems for Chapter 11
Demonstration Problem 111
Applying Cost Behavior Concepts to Business Decisions
Art On Tour, Inc. (AOTI) contracts with artists to exhibit their works to the public.
AOTI has agreed to pay a well known artist a $20,000 commission for the right to exhibit
his work for one month.
Required
Part a – Identifying Cost Behavior
1.
Determine the total commission cost and the commission cost per person if 1,000,
2,000, or 4,000 people attend the exhibition.
Is the commission cost fixed or
variable?
2.
AOTI provides patrons with books illustrating the artist’s work.
The books cost $5
each.
Determine the total cost of books and the cost per person if 1,000, 2,000, or
4,000 people attend the exhibition.
Is the book cost fixed or variable?
Part b – Operating Leverage and Risk/Reward Relationship
1.
AOTI pays an artist a $20,000 commission.
It sells 4,000 tickets at $6 each.
Prepare
an income statement.
Then prepare revised income statements assuming 10 percent
more than 4,000 and 10 percent fewer than 4,000 patrons attend the exhibition.
Calculate the percentage change in revenue and net income if attendance increases or
decreases 10 percent.
2.
Alternatively, AOTI pays the artist a commission of $5 per ticket sold.
It sells 4,000
tickets at $6 each.
Prepare an income statement. Then prepare revised income
statements assuming 10 percent more than 4,000 and 10 percent fewer than 4,000
patrons attend the exhibition.
Calculate the percentage change in revenue and net
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 Fall '07
 CMEasterwood
 Accounting, Income Statement, Net Income, My Company, commission cost

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