quarter sales revenue profit/(loss)
1 400 (280)
2 1200 360
3 1600 680
4 800 40
total 4000 800
Number of visitors for the year 50000.
Next year management anticipates an increase in unit variable cost of 10 percent and a profit target of 1 million.
1.calculate total fixed and total variable cost for the year. show annual results showing fixed and variable separately. show revenue and cost per visitor.
2.if there is no increase in visitors for the next year, what will be the required revenue rate per hotel visitor to meet the profit margin?
If the reuired revenue rate per vistor is not raised what will be required to meet the profit target?
Discuss the assumptions that are made in typical PV or break even analysis and whether they limit its usefulness.
1. To calculate the total fixed and total variable costs for the year, we first need to understand the concepts of fixed and variable costs.
Fixed costs are expenses that do not change based on the level of activity or production. These costs remain constant irrespective of the number of visitors or revenue generated. In this case, fixed costs are not provided, so we need to calculate them using other information provided.
Variable costs, on the other hand, are expenses that vary in direct proportion to the level of activity or production. In this case, we can calculate the unit variable cost by finding the average per unit variable cost from the quarter data.
To calculate the unit variable cost:
1st quarter: (Sales revenue - Profit)/(Number of visitors) = (400 - (-280))/50000
2nd quarter: (Sales revenue - Profit)/(Number of visitors) = (1200 - 360)/50000
3rd quarter: (Sales revenue - Profit)/(Number of visitors) = (1600 - 680)/50000
4th quarter: (Sales revenue - Profit)/(Number of visitors) = (800 - 40)/50000
Calculate the average of these unit variable costs:
(Unit variable cost 1 + Unit variable cost 2 + Unit variable cost 3 + Unit variable cost 4)/4
Now, multiply the average unit variable cost by the number of visitors to get the total variable cost for the year.
To calculate the total fixed cost, subtract the total variable cost from the total cost for the year.
Revenue per visitor can be calculated by dividing the total revenue for the year by the number of visitors.
Cost per visitor can be calculated by dividing the total cost for the year by the number of visitors.
2. If there is no increase in visitors for the next year, we need to calculate the required revenue rate per hotel visitor to meet the profit margin of 1 million.
To calculate this, we need to determine the profit per visitor for the current year. We can do this by subtracting the total cost for the year from the profit target and dividing the result by the number of visitors.
Profit per visitor = (Profit target - Total cost for the year) / Number of visitors
Now, add this profit per visitor to the cost per visitor calculated earlier to obtain the required revenue rate per visitor.
If the required revenue rate per visitor is not raised, to meet the profit target, we need to find the additional profit needed. Multiply the profit per visitor by the number of visitors and subtract it from the profit target.
Assumptions and limitations of PV or break-even analysis:
- Assumes fixed and variable costs remain constant and do not change with changes in the level of activity or production.
- Assumes linear relationships between cost, revenue, and volume.
- Assumes all costs can be appropriately categorized as either fixed or variable.
- Assumes that selling price per unit and variable cost per unit remain constant.
- Assumes a single revenue source and does not consider multiple products or revenue streams.
- Assumes that all units are sold or produced.
- Assumes a constant sales mix and does not consider changes in the product mix.
- Assumes constant efficiency and productivity of resources.
- Assumes that external factors such as competition, market demand, and economic conditions remain constant.
- Assumes that all costs are accurately known and controllable.
These assumptions limit the usefulness of break-even analysis in environments where these assumptions may not hold true, leading to inaccuracies in determining the break-even point or profit targets. Therefore, it is essential to consider these assumptions and their potential impact while using break-even analysis.