ACCT CH. 11 Outline

# The books cost 5 each determine the total cost of

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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? Variable cost 1,000 people attend 2,000 people attend 4,000 people attend Total cost of books 5*1,000 5*2,000 5*4,000 Flexible Budget Anaylsis: 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. 3,600 (400 off) 4,000 tickets 4,400 tickets Rev from ticket sales (\$6 each) 3,600 * 6 = 21,600 4,000 * 6 = 24,000 4,400 * 6 = 25,400 Commission 20,000 20,000 20,000 Margin 1,600 4,000 6,400 (4,000 – 1,600)/4,000 = 60% decrease in profits (4,000 – 6,400)/4,000 = 60% increase in profits 11-3

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Chapter 11 - Cost Behavior, Operating Leverage, and Profitability Analysis Demonstration Problem 2: Effect of Cost Structure Zoom Company / Raft Away Company Zoom Company and Raft Away Company provide rafting tours on Big Bear River. Zoom Company pays tour guides fixed salaries. It budgets salaries expense at \$160,000 per year. Raft Away Company pays tour guides \$40 per rafter served. Rafters are charged \$50 per tour. Both companies expect to carry approximately 4,000 rafters during the year. Required a. Prepare budgeted annual income statements for the two companies. b. In an effort to lure rafters away from Raft Away Company, Zoom Company lowers the price per rafter to \$39. Prepare revised income statements for both companies. Assume that Zoom Company serves 6,000 rafters who each pay \$39 per tour, while Raft Away Company serves only 2,000 rafters who pay \$50 per tour. c. Suppose Raft Away Company matches the \$39 price set by Zoom Company. Prepare income statements for both companies assuming that each company serves 4,000 customers. Does this make sense to meet the price? d. What is the break-even point for Zoom and Raft Away?
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