Académique Documents
Professionnel Documents
Culture Documents
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.
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
=510000/850
15
=12750/850
1440
=0.2*7200
6055
=4000+600+15
+1440
1145
=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
Part c
In case the amount paid to instructor becomes 3500, the contribution margin will
increase to
1145+500 = $1645
New Contribution Margin = $1645
1645*x 1018000 = 0 (For breakeven point)
X = 618.84
Now only 619 classes need to be conducted in order to reach break-even point.
might still be higher than 619. Also capacity can be increases to 25 per class which
will accommodate more students in less number of classes and increasing the
revenue.
Classes needed under full capacity to fulfill the current demand
= Current Students/25 = (850*20)/25 = 680
Even if the capacity falls to 680 due to decrease in availability of trainers she will
still cross break even and fulfill the demand. Hence she should go with the decrease
in compensation of trainers.
Part d
Contribution margin will remain the same in this case.
New Profit = (Contribution Margin)*(Number of Classes) Fixed Costs
= 1145*880 1018000
New Profit = -10400$
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.