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2-18 Classification of costs, service sector. Market Focus is a marketing research firm that organizes focus groups for consumer-product companies. Each focus group has eight individuals who are paid $60 per session to provide comments on new products. These focus groups meet in hotels and are led by a trained, independent marketing specialist hired by Market Focus. Each specialist is paid a fixed retainer to conduct a minimum number of sessions and a per session fee of $2,200. A Market Focus staff member attends each session to ensure that all the logistical aspects run smoothly.Classify each cost item (A–H) as follows:a. Direct or indirect (D or I) costs of each individual focus group.b. Variable or fixed (V or F) costs of how the total costs of Market Focus change as the number of focus groups conducted changes. (If in doubt, select on the basis of whether the total costs will change substantially if there is a large change in the number of groups conducted.)You will have two answers (D or I; V or F) for each of the following items:Cost Item (D or I V or F)A. Payment to individuals in each focus group to provide comments on new productsB. Annual subscription of Market Focus to Consumer Reports magazineC. Phone calls made by Market Focus staff member to confirm individuals will attend a focus group session (Records of individual calls are not kept.)D. Retainer paid to focus group leader to conduct 18 focus groups per year on new medical productsE. Recruiting cost to hire marketing specialistsF. Lease payment by Market Focus for corporate officeG. Cost of tapes used to record comments made by individuals in a focus group session(These tapes are sent to the company whose products are being tested.)H. Gasoline costs of Market Focus staff for company-owned vehicles (Staff members submit monthly bills with no mileage breakdowns.)I. Costs incurred to improve the design of focus groups to make them more effective2-19 Classification of costs, merchandising sector. Band Box Entertainment (BBE) operates a large store in Atlanta, Georgia. The store has both a movie (DVD) section and a music (CD) section. BBE reports revenues for the movie section separately from the music section.Classify each cost item (A–H) as follows:a. Direct or indirect (D or I) costs of the total number of DVDs sold.b. Variable or fixed (V or F) costs of how the total costs of the movie section change as the total number of DVDs sold changes. (If in doubt, select on the basis of whether the total costs will change substantially if there is a large change in the total number of DVDs sold.)You will have two answers (D or I; V or F) for each of the following items:Cost Item (D or I V or F)A. Annual retainer paid to a video distributorB. Cost of store manager’s salaryC. Costs of DVDs purchased for sale to customersD. Subscription to DVD Trends magazineE. Leasing of computer software used for financial budgeting at the BBE storeF. Cost of popcorn provided free to all customers of the BBE storeG. Cost of cleaning the store every night after closingH. Freight-in costs of DVDs purchased by BBE3-19 CVP exercises. The Incredible Donut owns and operates six doughnut outlets in and aroundKansas City. You are given the following corporate budget data for next year:Revenues $10,400,000Fixed costs $ 2,100,000Variable costs $ 7,900,000Variable costs change based on the number of doughnuts sold.Compute the budgeted operating income for each of the following deviations from the original budget data.(Consider each case independently.)1. An 11% increase in contribution margin, holding revenues constant2. An 11% decrease in contribution margin, holding revenues constant3. A 4% increase in fixed costs4. A 4% decrease in fixed costs5. A 7% increase in units sold6. A 7% decrease in units sold7. An 11% increase in fixed costs and a 11% increase in units sold8. A 4% increase in fixed costs and a 4% decrease in variable costs9. Which of these alternatives yields the highest budgeted operating income? Explain why this is the case.3-20 CVP exercises. The Doral Company manufactures and sells pens. Currently, 5,000,000 units are sold per year at $0.50 per unit. Fixed costs are $900,000 per year. Variable costs are $0.30 per unit.Consider each case separately:1. a. What is the current annual operating income? b. What is the present breakeven point in revenues?Compute the new operating income for each of the following changes:2. A $0.04 per unit increase in variable costs3. A 10% increase in fixed costs and a 10% increase in units sold4. A 20% decrease in fixed costs, a 20% decrease in selling price, a 10% decrease in variable cost per unit, and a 40% increase in units soldCompute the new breakeven point in units for each of the following changes:5. A 10% increase in fixed costs6. A 10% increase in selling price and a $20,000 increase in fixed costs3-38 CVP analysis, shoe stores. The HighStep Shoe Company operates a chain of shoe stores that sell10 different styles of inexpensive men’s shoes with identical unit costs and selling prices. A unit is defined as a pair of shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a sales commission. HighStep is considering opening another store that is expected to have the revenue and cost relationships shown here.ABCDE1UNIT VARIABLE DATA (PER PAIR OF SHOES)Annual fixed costs2Selling price$60Rent$30,0003Costs of shoes$37Salaries100,0004Sales commission$3Advertising40,0005Variable cost per unit$40Other fixed costs10,0006Total fixed costs180,000Consider each question independently:1. What is the annual breakeven point in (a) units sold and (b) revenues?2. If 8,000 units are sold, what will be the store’s operating income (loss)?3. If sales commissions are discontinued and fixed salaries are raised by a total of $15,500, what would be the annual breakeven point in (a) units sold and (b) revenues?4. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of$2.00 per unit sold, what would be the annual breakeven point in (a) units sold and (b) revenues?5. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of$2.00 per unit in excess of the breakeven point, what would be the store’s operating income if 12,000 units were sold?
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