Cost categories, cost function, opportunity cost The university?s Wildcat Lair c
ID: 2655112 • Letter: C
Question
Cost categories, cost function, opportunity cost The university?s Wildcat Lair caters to students and serves sandwiches and beverages. It has been reporting losses in past months. In July, for example, the loss was $5,000. The Lair purchases prepared food directly from University Food Services. This charge varies proportionately with the number and kind of meals served. Personnel who are paid by the Lair serve the food, tend the cash register, bus and clean tables, and wash dishes. The staffing levels in the Lair rarely change; the existing staff can usually handle daily fluctuations in volume. Administrative costs are primarily the salaries of the Lair manager and her office staff. Because the university pro vides support services for the Lair, such as payroll, human resources, and other administrative support, the university charges a surcharge of 10% of its revenue. Utility costs are the costs of cooling, heating, and lighting the Lair during its normal operating hours. The university?s management is considering shutting the Lair down because it has been operating at a loss. A. List the fixed expenses of the Wildcat Lair. B. List the variable expenses of the Wildcat Lair and the most likely cost driver for each expense. C. Write out the cost function for running the Wildcat Lair. D. Estimate the profit or loss for August if the revenues of the Lair increase to $80,000. E. Explain why the original data show a loss but part (D) shows a profit. Be specific. F. What is the university?s opportunity cost if it closes the Wildcat Lair? Describe the opportunity cost and provide calculations for July and August.Explanation / Answer
Question A Fixed Cost: Administrative Cost $ 10,000.00 Cashier $ 5,500.00 Total Fixed Cost $ 15,500.00 Question B Variable cost: Purchase of prepared food $ 21,000.00 Serving people $ 30,000.00 University Sercharge $ - Utilities $ 1,500.00 Total Variable Cost $ 52,500.00 Question C Total %age on Sales Revenue $ 70,000.00 Variable cost: Purchase of prepared food $ 21,000.00 30.00% University Sercharge $ 7,000.00 10.00% Utilities $ 1,500.00 2.14% Total Variable Cost $ 29,500.00 42.14% Contribution Margin $ 40,500.00 57.86% Fixed Cost: Serving people $ 30,000.00 Administrative Cost $ 10,000.00 Cashier $ 5,500.00 Total Fixed Cost $ 45,500.00 Loss $ (5,000.00) Question D Total Revenue $ 80,000.00 Variable cost: Purchase of prepared food $ 24,000.00 University Sercharge $ 8,000.00 Utilities $ 1,714.29 Total Variable Cost $ 33,714.29 Contribution Margin $ 46,285.71 Fixed Cost: Serving people $ 30,000.00 Administrative Cost $ 10,000.00 Cashier $ 5,500.00 Total Fixed Cost $ 45,500.00 Profit $ 785.71 Question E. Wildcat Lair have contribution margin of 57.86 %. And for 70,000 revenue it is having 40500 Contribution toward recovering its fixed cost of 45500. When sales increased by 10,000 its Contribution increased by 10,000 x 57.86% = 5785.71. This amount is sufficient to cover current loss of 5000 Question F. Entire Contribution of $40,500 in the month of July and 46285.71 in the month of August are the opportunity cost of loosing the Contribution. If company shuts down Loss will increase by 40500 in July and 46285.71. July August Revenue $ - 0 Variable Cost $ - 0 Contribution $ - $ - Fixed Cost Serving people $ 30,000.00 $ 30,000.00 Administrative Cost $ 10,000.00 $ 10,000.00 Cashier $ 5,500.00 $ 5,500.00 Total Fixed Cost $ 45,500.00 $ 45,500.00 Loss if Shut down $ (45,500.00) $ (45,500.00) Profit if operates $ (5,000.00) $ 785.71 Opportunity Cost $ (40,500.00) $ (46,285.71)