Week 9 ACCY 111 RJD Lecture 5

Monthly operating costs fixed in short term

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Monthly operating costs fixed in short term (management salaries, other staff costs, general area power costs, etc) $200,000 per month. Variable operating costs (laundry, room power, water rates, etc.) $50 per room per night.
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Accepting/Rejecting Special Contracts Last month’s operating statement shows the following: $ Revenue (30 * 200 * $150) * 80% = 720,000 Monthly operating costs 200,000 Variable room costs (200 * 80%) * 30 * $50 240,000 Monthly fixed overheads 150,000 590,000 Operating Profit $ 130,000
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Accepting/Rejecting Special Contracts The Hotel International has an opportunity to place as many rooms as it wishes on Grab a Room – an internet site offering last minute deals on hotel accommodation that normally discounts room prices by 60%. Should the hotel offer its rooms at $60 ?
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Accepting/Rejecting Special Contracts Revenue from Grab a Room (200 * 20%) * 30 * $60 = $ 72,000 Costs of rooms (200 * 20%) * 30 * $50 = $ 60,000 Net gain from late bookings $ 12,000
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Accepting/Rejecting Special Contracts Is there another customer who would pay more for spare capacity rather than ‘selling it off’ cheaply? Potential loss of customer goodwill as a result of selling the same product at different prices/ It may be better to reduce total capacity and thereby reduce fixed costs, if inability to sell full production capacity is an ongoing problem. Accessing overseas markets may be a means of selling product / excess capacity at a different pricing structure.
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The most efficient use of scarce resources If the availability of one or more resources is limited, an organisation will be unable to accept every opportunity that yields a positive contribution. Limited resources might include raw materials, the capacity of manufacturing plant (machine time), space, or specialist staff – in both the manufacturing and service sectors. First, identify the key limiting factor
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The most efficient use of scarce resources The challenge is then to establish the optimum output within the constraints to maximise contribution, and thus profits. Which products or services should be produced and how many of each should be produced? The most profitable combination of products will occur when the contribution per unit of the limiting factor is maximised. The decision rule = maximise the contribution per unit of limiting factor
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The most efficient use of scarce resources Red Box Blue Box Green Box $ $ $ Selling price per box 50.00 40.00 70.00 Variable costs per box 20.00 20.00 35.00 Contribution per box 30.00 20.00 35.00 All things being equal, the green boxes are the most profitable to manufacture. The company would therefore seek to focus its production and sales activity on that product. (Assuming that the market will buy as many units of whatever product the company chooses to produce.) A packaging company produces three types of boxes
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The most efficient use of scarce resources Red Box Blue Box Green Box $ $ $ Selling price per box 50.00 40.00 70.00 Variable costs per box 20.00 20.00 35.00 Contribution per box 30.00 20.00 35.00 Skilled labour time per box 4 4 8 Contribution per labour hour $ 7.50 $ 5.00 $ 4.38 For 100 labour hours $ 750.00 $ 500.00 $ 437.50 But what if the manufacturer was limited to 2.5 skilled staff and therefore 100 skilled labour hours per week?
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