Breakeven analysis of Green Lodge
(50 Marks)
Green Lodge is a company operated by Adam as a summer vacation getaway in the great Arizona valley. It operates camping lodges offering accommodation and adventure trips for individuals and groups. Over the last few years, the average number of tourists trips was 50. The average charge per person for the cruise, including group discounts was $100.The company operates from mid-may until mid-August. On average the lodge takes 90 (adventure trips) during this period.
The lodge requires a staff of 6 and is managed by the owner of the company. University students with extensive tourism experience have been willing to work on a daily basis of $120. They are paid only if there are any adventure trips. The lodge also provides non-alcoholic refreshments and a light lunch. These are required daily from a local cafeteria and cost on average $20 per person. The daily operating expenses, fuel and miscellaneous supplies average $60 per trip. The company has a variety of annual expenses (fixed costs) including: maintenance, depreciation, marketing, licenses, Etc… Totaling approximately $73,440.
Required:
- Compute the revenue, variable expenses and the contribution margin for each trip (15 marks)
- Compute the number of trips Green Lodge must have each year to breakeven. (8 marks)
- The Adam, the owner, expects a profit of $130,000 (being total return on his capital and remuneration for being the manager). Using the concept of “contribution margin” and a cost-volume-profit notion, estimate how many trips the Lodge needs to make to reach this objective? Is there a realistic expectation? (15 marks)
- Prepare a contribution margin income statement for Green Lodge assuming 100 adventure trips are being done during this period. (12 marks)
Part B
Question 1 (30 Marks)
Cost accounting is an accounting process that measures all of the costs associated with production, including both fixed and variable costs. The purpose of cost accounting is to assist management in decision-making processes that optimize operations based on efficient cost management.
Required:
Identify and clearly explain 5 different types of costs that are used in managerial decision making. In addition, provide a clear and relevant example for each of these costs.
Question 2 (20 Marks)
The role of management accountants has been well-known to the corporate world as they widely contribute for performing planning, controlling and decision making functions effectively and efficiently through providing solid accounting information with good analysis. Liebherr Industries has been growing in terms of revenue and its customer base over the past decade. The Board of Directors of the company has been claiming that they should have one management accountant for their company to achieve better performance in the coming periods.
Production and Cost Details
Liebherr manufactures and sells many replacement parts for its equipment. PX-111 is one of such parts that has following cost and selling price structure:
| Information | $ per unit | |
| Selling Price | 700
|
|
| Direct Material
|
300
(per unit of material) |
300 |
| Direct Labour cost | 50 per hour | 300
|
| Number of labor hours needed to manufacture one unit of product | 6 hours | |
| Fixed Costs for the company
|
$40,000 |
Estimations for the next year 2021
The company has estimated the following information;
(i) Sales Estimations
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |
| Number of units to be sold (Units) | 1,000 | 1,100 | 1,200 | 1,300 |
(ii) Inventory estimations
| Inventory | Beginning
(first quarter) |
Ending |
| Finished Goods | 200 units | The company desires to have an ending inventory each quarter equal to 25% of the next quarter’s sales. The first quarter’s sales for the following year (2022) is expected to be 1,400 units |
| Materials | $120,000 | The company desires the ending balance in materials inventory to be 45% of the next quarter’s cost of materials. The cost of materials for the first quarter in the following year (2022) is expected to be $170,400 |
Required:
Based on the estimated information given above, prepare
- Sales Budget (10 marks)
- Production Budget (10 marks)
