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We can back out the new overhead cost as follows:Total contribution from stems90% × 50,000 × 0.12$5,400Total contribution from bouquets10% × 50,000 × 0.15750Total contribution margin$6,150Profit750= Fixed costs (overhead)$5,400/dayThus, total overhead with the new product mix is $5,400 × 30 = $162,000 per month. c.Notice that without the bouquets, the profit would have been $1,000 per day (= 50,000 × $0.12 - $5,000). The only reason that Vermeer’s profit has decreased by $250 a day or $7,500 per month with the introduction of bouquets is a corresponding increase in overhead costs. Let us verify this intuition by allocating the overhead to individual products. Under the old system, each stem accounted for $0.10 of overhead. Thus, 0.9 × 50,000 × $0.10 = $4,500 a day or $135,000 per month. The remainder of $900 a day ($27,000 per month) must pertain to the bouquets. In other words, each stem in a bouquet consumes $900 per day /5,000 stems per day= $0.18. This higher consumption of overhead resources results in a negative profit margin for bouquets. Even though the stems in bouquets have higher contribution margins, they also consume more overhead, leading to lower profit margins. Thus, as the bouquet business expands, Jim loses money.d.It is not surprising that assembling stems into bouquets consumes proportionately more overhead than selling them individually. First, there is labor involved in assembling the bouquets. Second, bouquets consume some supplies such as ribbons, paper and such. Third, assembling bouquets requires space, and, finally, they might require more delicate handling relative to individual stems. These factors might explain why total overhead increased even though the volume of stems processed did not change. 10. 53a. This problem is a useful exercise in illustrating how different cost objects consume the same resources in different mixes.ShortLongRegular room rate$1,800 /day$3,600 $16,200 Spending on meals$450/day900 4,050 Miscellaneous items$400/$2,500400 2,500 Total revenue$4,900 $22,750 Variable cost$150/day 300 1,350 Balakrishnan, Sivaramakrishnan, & Sprinkle – 2eFOR INSTRUCTOR USE ONLY10-18
Room maintenance$300 per three days 300 900 Check in and check out$150/$250 150 250 Concierge serviceVaries200 600 Guest spending on meals etc$450/day; Variable cost is 40%3601,620Guest spending on miscellaneous services$400/ $2,500 for long-stay guests.160 1,000 Profit per stay$3,430 $17,030 Profit per day$1,715 $1,892.22b.The above analysis indicates that long-stay guests are more profitable than short-stay guests. The difference in profitability arises from several factors: First, batch level expenses such as the cost of check-in are spread out over more days. Second, the intensity of resource usage (e.g., concierge) decreases as time passes. Third, the amount of money spent on miscellaneous services increases as the hotel is able to cross-sell some items (e.g., laundry, massages and so on.) However, the offset is that long-stay guests might also increase some costs such as the welcome basket.