Exercise 4 Calculating Fixed Costs, Variable Costs and BEP

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Month Meals Served (Service Volume) Total Costs July 3,600 $21,000.00 August 4,100 $22,000.00 September 4,300 $23,150.00 October 4,700 $24,500.00 November 4,800 $25,500.00 December 4,900 $26,200.00 The total contracted meals for the year is 33,000 The contracted cost per meal is 6.50 Step 1: Compute the difference in service volume (number of meals served) between the high and the low time periods (months). Subtract the low time period from the high time period. High Time Period Service Volume Low Time Period Service Volume Difference in Service Volume Step 2: Compute the difference in costs between the high and low time periods (months). Subtract the low time period from the high time period. High Time Period Costs Low Time Period Costs Difference in Cost Step 3: Compute the variable cost per unit of service. Divide cost by service volume Cost (Difference between high & low time periods – Step 2) Service Volume (Difference between high & low time periods – Step 1) Variable Cost Per Unit Step 4: Compute the total variable costs for the low time period. Multiply variable cost per unit by service for low time period. Variable Cost Per Unit (answer from Step 3) Service For Low Time Period Total Variable Cost Step 5: Compute total fixed costs for the low time period. Subtract total variable cost from low time period cost. Low Time Period Cost Total Variable Cost (answer from Step 4) Total Fixed Cost Step 6: Compute the Break-Even Point using the BEP Formula PX = A + BX, where: P = Cost Per Meal X = What you are solving for A = Total Fixed Costs (from Step 5) B = Variable Cost Per Unit (from Step 3) Show calculations below: Step 7: Compute the BEP for the year by multiplying the answer from Step 6 by 12. BEP (from Step 6) Months in the Year Annual BEP Step 8: Determine the number of meals by subtracting the BEP for the year (answer from Step 7) from the Total Contracted Meals (see scenario). Total Contracted Meals BEP Number of Meals Step 9: Determine the Revenue using the number of meals (answer from Step 8) multiplied by the contracted cost per meal. Number of Meals Cost Per Meal Revenue Step 10: Determine the Total Cost using the number of meals (answer from Step 8) multiplied by the variable cost (Step 3). Number of Meals Variable Cost Total Cost Step 11: Subtract the Total Cost (Step 10) from the Revenue (Step 9) and this is your Profit Revenue Total Cost Profit
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