Solution manual managerial accounting and finance for hospitality operations CHAPTER 06

Discretionary cost is a cost that may or may not be incurred at the sole discretion of a particular person, usually the general manager.. Nonemergency maintenance is an example of a disc

COST MANAGEMENT

I Questions

1 Refer to page 148, Classification of Costs, under “A.”

2 Discretionary cost is a cost that may or may not be incurred at the sole discretion

of a particular person, usually the general manager Nonemergency maintenance

is an example of a discretionary cost The building exterior could be painted this year, or the painting could be postponed until next year Either way sales revenue should not be affected The general manager has the choice, thus it is a discretionary cost Note that a discretionary cost is only discretionary in the short run For example, the building will have to be painted at some time in order to maintain its appearance Another example is charitable contributions

3 Refer to page 148, Classification of Costs, under “B.”

4 Relevant costs in deciding to buy a new vacuum cleaner are

1 Purchase price of the cleaner

2 Maintenance costs

3 Other avoidable costs

5 Most costs do not fit neatly into the fixed or the variable category Most have an element of fixed expense and an element of variable – and then not always variable directly to sales on a straight-line basis Such costs would include payroll, maintenance, utilities, and most of the direct operating costs In order to make some useful decisions, it is advantageous to break down these semifixed

or semivariable costs into their two elements: fixed or variable

II Practical Exercises and Problems

A EXERCISES

EXERCISE 1

Variable cost percentage = P23,040 P48,000 = 48%

EXERCISE 2

Contribution margin = P24,440 x 0.58 = P14,175.20

EXERCISE 3

Sales revenue (40 x P150) P6,000 Variable costs (0.75 x P6,000) 4,500

The proposal may be accepted because it will yield an income of P1,000

EXERCISE 4

Café : 1,920 / 2,400 = 0.80 Bar : 480 / 2,400 = 0.20 Allocation of indirect costs to café: 0.80 x P14,000 = P11,200

EXERCISE 5

Variable cost per guest

Total fixed cost = P15,500 – (P0.875 x 14,000)

= P15,500 – P12,250

= P3,250 or

= P12,000 – (P0.875 x 10,000)

= P12,000 – P8,750

= P3,250

B PROBLEMS

PROBLEM 1

= P15,500 – P12,00014,000 – 10,000 = P3,500 4,000 = P0.875

PROBLEM 2

Requirement 1

Variable cost rate

At 60% occupancy

FC = [12,600 – (120 x 60)]

= 12,600 – 7,200

= 5,400

At 70% occupancy

FC = [13,800 – (120 x 70)]

= 13,800 – 8,400

= 5,400

Requirement 2

VC rate per 1%

Requirement 3

Estimated repairs and maintenance costs for 2004:

Variable = P120 x 105% x 68 x 12 = P102,816

Fixed = 5,400 x 105% x 12 = 68,040

P170,856

PROBLEM 3

Requirement (1)

Point of indifference

P3,000 x 12 = 0.05x P36,000 = 0.05x

x = P720,000 (annual sales) Fixed charges

P3,000 x 12 = P36,000 Variable charges

5% x P720,000 = P36,000

= P13,800 – P12,60070 – 60 = P1,200 10 = P120

= P1,200 10 = P120

Requirement (2)

Since expected sales will amount to P1,000,000 for which annual rent will be P50,000; it would be better to enter into a fixed monthly rental rate of P3,000 or P36,000 annual rent

PROBLEM 4

Requirement (1)

1 Cost of food sold = Variable

5 Other operating costs = Variable

Requirement (2)

VC per unit FC per month

Payroll Costs

Utilities

Cost equation: TC = P3,500 + P2.72 x

x = number of units

5,000 – 3,500 6,000 – 3,000

420 – 360 6,000 – 3,000

Requirement (3)

TC for 8,000

Monthly sales level = P3,500 + P2.72 (8,000)

= P25,260

PROBLEM 5

Requirement (1)

The cost that is not relevant is the present book value of P1,000 of the old dishwasher

Requirement (2)

Alternatives Relevant costs Buy new Keep old

Salvage value of present dishwasher now 2,000

Salvage value of present dishwasher at end of 5 years 300

Salvage value of new dishwasher at end of 5 years 2,000

P(68,500) P(68,200) Net advantage of keeping the old dishwasher P 300 Keeping the old dishwasher yields a lesser cash outflow of P300 All things being equal, the company can continue using the old dishwasher

Problem 6

Cash In (Out) Flow Model 1 Model 2 Model 3

Trade-in value at end of life 1,000 1,200 800 Cash from sale of old machine 200 200 200 Installation of new machine (75) (100) (100)

Model 1 should be chosen because the analysis shows the lowest cash outflow of

P36,725

PROBLEM 7

Requirement (a)

(1) Dining room 1,200 / 3,000 = 0.40 x P520,000 = P208,000 Coffee shop 840 / 3,000 = 0.28 x P520,000 = P145,600 Lounge 960 / 3,000 = 0.32 x P520,000 = P166,400 (2) The owner may accept the offer of the souvenir store operator to rent the coffee shop space for P80,000 because it exceeds the contribution to indirect cost of the coffee shop by P14,000

Requirement (b)

Operating Results if the Coffee Shop Space is rented out:

Dining Room Lounge

Souvenir Store Total

Sales / Rent P1,848,000 P1,393,000 P 80,000 P3,321,000 Direct costs 1,546,000 1,174,000 –

2,720,000

P 302,000 P 219,000 P 80,000 P 601,000

The restaurant operator will be better off if he rents out the coffee shop space His income will increase by P34,000

PROBLEM 8

a Variable cost per

room occupied

b Busiest month = 2,400 x P0.50 = P1,200

Slowest month = 1,200 x P0.50 = P 600

c Total fixed cost per month = P2,600 – (P0.50 x 2,400)

= P2,600 – P1,200

= P1,400

or

= P2,600 – P2,0002,400 – 1,200 = P600 1,200 = P0.50

= P2,000 – (P0.50 x 1,200)

= P2,000 – P600

= P1,400

PROBLEM 9

Variable wage cost = P17.50 x 100 = 1,750

Other variable cost = P 2.50 x 100 = 250

b Total selling price / revenue to earn 20% income on sales

Let x = total revenues

x = P12,000 + 0.2x

x =

x = P15,000 Price per person =

= P150

c The price of P112.50 is not sufficient to cover the expected cost of P120 per person The banquet department of the hotel should therefore not accept the function

P12,000 0.8

P15,000 100