Review Question

1. What is sales revenue forecasting?

2. What types of data are needed to forecast sales or revenues?

3. What is cost estimation?

4. What is the first step managers need to complete when estimating costs?

20. How does technology affect costs?

22. Identify three environmental factors that affect business decisions related to costs.

25. How does technological innovation generally affect a firm' s costs?

27. What is meant by the learning curve?

28. What are controllable costs?

Exercise and Problems

6. Mega Profits Company estimated its annual total cost function to be: Y = $150,000 + $.57 x Assuming that Y represents total cost and x equals the number of units sold, use this equation to answer the following questions:

a. What is the firm' s total fixed cost?

b. What is the firm' s variable cost per unit?

c. Compute total costs if the firm sells 100,000 units.

d. Compute total costs if the firm sells 200,000 units.

e. If the firm' s product sells for $1.00, how many units does the firm need to sell to break even?

f. If the firm' s product sells for $1.50, how many units does the firm need to sell to break even?

7. Morrison Hotel uses its banquet room to host parties, dinner dances, and business meetings. The hotel serves meals and provides a variety of services for each event. A local consultant analyzed recent cost data and estimated the total cost function per event to be as follows: Y = $1,000 + $9.00 x Assuming that Y represents total cost and x equals the number of guests, use this equation to answer the following questions:

a. What is the firm' s total fixed cost per event?

b. What is the firm' s variable cost per guest?

c. Compute total costs if 50 guests attend the event.

d. Compute total costs if 100 guests attend an event.

e. If the hotel charges $25.00 per guest, how many guests must attend for the hotel to break even at each event?

f. If the hotel charges $28.00 per guest, how many guests must attend for the hotel to break even at each event?

g. If the hotel charges $28.00 per guest, would you advise this hotel to host events for 50 or fewer guests? Why or why not?

3. Durango Mountain Bike Company wants to open a bicycle repair shop in a suburb of a major metropolitan area. The industry association estimates that 20 percent of bicycles are repaired by similar service companies and that the average owner spends $100 per bicycle on maintenance each year. The census and local chamber of commerce data indicate that there are 10,000 bicycles in the county. Three other competitors exist within a twenty-five-mile radius of the proposed business location. Based on a consumer survey, the owners believe that they can capture 30 percent of the market in the first year of operation. Based on these data, address the following requirements:

a. What is the potential number of bicycles likely to be commercially repaired?

b. What is the total potential bicycle repair revenue available in the market?

c. How much revenue can Durango Mountain Bike expect to generate?

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