question 4 a cost volume profit analysis mainly used by cost managemen
a. Cost-volume-profit analysis mainly used by cost-management accountants, financial
accountants and microeconomist to understand production, cost, and profit behaviour. Explain
the inter-relationship among total revenue, marginal revenue, and profit maximization. Why
does understanding contribution margin play important role in recovering total cost?
b. Two UW students intending to open a milkshake bar on the Corniche, Al-Khobar. As part of the
feasibility study the students studied the industry reports about existing restaurants which offer
similar products and conducted some basic research to estimate demand, potential cost and
expected revenue. The students wish to offer shakes with different flavour which are currently
popular among younger generation. Given that the economic performance, household income
changes over time, they make certain assumptions about cost, demand and possible margin and
selling prices. The students will hire two part-time workers to operate the business. Based on the
research, they expect to sell 1600 shakes per month with the projected selling price of 15 SAR and
the variable cost is expected to be 25 % of the selling price. To set up the business, the students
have to rent Shack which will cost SAR5000 per month. The following are costs related to the
operation of the business.
Shack rental per month
Milk-Shake Makers (4 unit @SAR2200) 2 years life 2400/24
Freezer (5-year life)
Tables and benches (3 years life):
Hire two part-time employees (SAR2400/ month)
Total monthly fixed cost
Using above information calculate the number of milkshakes they should sell in order to
have break-even. If you are expecting to have monthly profit of SAR30,000 how may
shakes you have to sell per month?
Now assume that both selling price and variable cost increase by 15 percent what should
be the break-even sale to cover the cost.
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