Question 4. 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): Insurance (annual): Hire two part-time employees (SAR2400/ month) Total monthly fixed cost Total cost 4800 6000 2400 1200 Fixed Monthly cost (SAR) 3000 ? ? ? ? 5000 ? Fixed/ni) ii) 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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