Bourbon House, a luxury waterfront restaurant, has store hours fluctuate from week to week. Its utilities costs and hours of operation for the last six (6) weeks are as follow: Week Hours of Operation Utilities Cost 1 55 6 480 2 60 6 600 3 64 7 460 4 70 7 600 5 45 5 400 6 40 5 200 Required: a) Use the high-low method to estimate the cost behaviour for the restaurant’s utilities costs, assuming that variable costs vary in proportion to the hours of operation. Express the cost behaviour in a cost function (Y = a + bX). b) During the second week of June, Bourbon House will be opened for 49 hours. Predict the restaurant’s total utilities cost for the week. c) Explain the impact of a decrease in the level of activity on (i) total variable cost; and (ii) variable cost per unit of activity. need to answer all questions with workings
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Bourbon House, a luxury waterfront restaurant, has store hours fluctuate from week to week.
Its utilities costs and hours of operation for the last six (6) weeks are as follow:
Week Hours of Operation Utilities Cost
1 55 6 480
2 60 6 600
3 64 7 460
4 70 7 600
5 45 5 400
6 40 5 200
Required:
a) Use the high-low method to estimate the cost behaviour for the restaurant’s utilities
costs, assuming that variable costs vary in proportion to the hours of operation. Express
the cost behaviour in a cost function (Y = a + bX).
b) During the second week of June, Bourbon House will be opened for 49 hours. Predict the
restaurant’s total utilities cost for the week.
c) Explain the impact of a decrease in the level of activity on (i) total variable cost; and (ii)
variable cost per unit of activity.
need to answer all questions with workings
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