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Case 1-1 Local 635

Part a
Variable Costs

Food ingredients cost. For example: Meat, Salad cost given in the case.
Electricity cost for preparation of an order. For example: Electricity used while
oven is working.
Cost of free meal for workers. (depends on the type of meal ordered and cost
of ingredients involved in it)

Sunk Costs

Cost of Oven

Fixed Costs

Labour wages. (Assuming cooks are not extending their regular shift for
preparing workers meal)
Store rental cost.
Cost of depreciation on Oven.

Opportunity Costs

When the hotel is serving a Prime Rib meal to their workers for 22$ they are
losing out on 32$ which they wouldve gotten from a regular customer
(Assuming they have enough demand). In this case opportunity cost of giving
a meal to their workers is 32$.
A case of opportunity cost may also arise if a worker eats the last prime rib
meal available and a customer walks in asking for the same meal and the
hotel loses the sale. In this case the opportunity cost will be the menu price
of the meal.

Part b
Source of Conflict
The source of conflict here is that in the agreement it is not mentioned which type
of cost will be considered when calculating the cost of the meal. Here the workers
are only using incremental cost for their argument which is the cost of ingredients.
The management is using both incremental and fixed costs to calculate the cost of
the meal. They are even citing sunk cost of the oven in their argument. The
ambiguity of the labour agreement in not mentioning type of cost is causing the
conflict.
Rewording the Labour Agreement
Since the management wants to consider all types of costs including sunk cost while
calculating the cost of meal, it is better to take a percentage of the menu price for

calculating the cost. For example 80% of the menu price can be taken as the cost of
the meal and if this amount exceeds 12$ then the workers can be charged extra
depending on the amount.

Case 4-2 Mayfield Software Customer Training


Part a
The central charges are indirect costs. These costs are not related to the Customer
Training group directly. These expenses are for the whole company such as branding
expense, CEO and presidents salary, Legal costs. These are fixed costs and will
not change after the closure of customer training group.
Hence the companys profit will decrease by $1179250 i.e. profit before central
charges for training center, in case Mayfield Management shuts down the training
center.

Part b

Reven
ue

Varia
ble
Costs

Revenue Per
Class
Trainer Cost
per class
Operating
Manuals Cost
Per class of 20
Postage Cost
per class
Central
Charges Per
Class
Total Variable
Costs
Contribution
Margin Per
Class

In $

Formula

Calculation

7200

Total Revenue/Number of
Classes

=6120000/850

4000

Given

600

Total Operating Manuals


Cost/Number of classes

=510000/850

15

Total Postage Cost/Number


of Classes

=12750/850

1440

20% of the Revenue

=0.2*7200

6055

Sum of all Variable Costs

=4000+600+15
+1440

1145

Revenue - Total Variable


Costs

=7200-6055

Fixed Costs
Fixed
Costs

Director Salary
Receptionist

In $
18000
0
60000

Office Manager
Utilities,Phone
etc.
Lease Expenses
Rent
Advertising
Total Fixed
Cost

80000
38000
40000
0
10000
0
16000
0
10180
00

Using the above data we can form the equation


(Contribution margin per class)*(number of classes) Fixed Costs = 0
1145*x 1018000 = 0 (For breakeven point)
X = number of daylong classes conducted
X = 889.08
So 890 classes have to be conducted in order to reach the break-even point.

Part c
In case the amount paid to instructor becomes 3500, the contribution margin will
increase to
1145+500 = $1645
New Contribution Margin = $1645
1645*x 1018000 = 0 (For breakeven point)
X = 618.84
Now only 619 classes need to be conducted in order to reach break-even point.

Should Marie pursue this option?


It depends on the availability of Trainers because some trainers will opt out of the
program when the compensation is decreased. This might result in scarcity of
trainers to conduct more classes, hence the safety margin of classes compared to
break-even will decrease. But considering the current situation in which she is
already making losses, it is a good option to try and decrease the compensation
because currently 850 classes are conducted and after the decrease the number

might still be higher than 619. Also capacity can be increases to 25 per class which
will accommodate more students in less number of classes and increasing the
revenue.
Classes needed under full capacity to fulfill the current demand
= Current Students/25 = (850*20)/25 = 680
Even if the capacity falls to 680 due to decrease in availability of trainers she will
still cross break even and fulfill the demand. Hence she should go with the decrease
in compensation of trainers.

Part d
Contribution margin will remain the same in this case.
New Profit = (Contribution Margin)*(Number of Classes) Fixed Costs
= 1145*880 1018000
New Profit = -10400$
This can also be calculated by directly adding the additional profit to the old profit
= (Contribution Margin)*(Additional Classes) + Old Profit = New Profit
= 1145*30 44750
= -10400$
Since the breakeven is 890 she still needs 10 more classes to achieve it.

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