Question

Account Analysis Method Shirrell Blackthorn is the accountant for several pizza restaurants based in a tri-city area. The president of the chain wanted some help with budgeting and cost control, so Shirrell decided to analyze the accounts for the past year. She divided the accounts into four different categories, depending on whether they appeared to be primarily fixed or to vary with one of three different drivers. Food and wage costs appeared to vary with the total sales dollars. Delivery costs varied with the number of miles driven (workers were required to use their own cars and were reimbursed for miles driven). A group of other costs, including purchasing, materials handling, and purchases of kitchen equipment, dishes, and pans, appeared to vary with the number of different product types (e.g., pizza, salad, and lasagna). Shirrell came up with the following monthly averages:

Food and wage costs $155,000
Delivery costs $22,950
Other costs $260
Fixed costs $265,000
Sales revenue $650,000
Delivery mileage in miles 9,000
Number of product types 20
Required:
1. Calculate the average variable rate for the following costs: food and wages, delivery costs, and other costs.
2. Form an equation for total cost based on the fixed costs and your results from Requirement 1.
3. The president is considering expanding the restaurant menu and plans to add one new offering to the menu. According to the cost equation, what is the additional monthly cost for the new menu offering?

Answer 1

1. Average variable rate

a. Food and wages = Food and wages expenses/ Total revenue = 155000/650000 = 0.2385 times

b. Delivery cost= Total delivery expenses/Number of mile driven = 22950/9000 = $2.5500/mile

c. Other cost = Total other expenses/ Number of items =260/20 = $13/item

2. Total cost = Total Fixed cost + Total Variable cost

= 265000 + [0.2385(a) + 2.55(b) + 13(c). a=Sales revenue, b=Number of miles driven, c=Number of items

3. If any new item is added to the menu then only the Variable expenses incurred will increase, fixed assets will remain constant. So, the total cost will go up the sum effect of 0.2385 times of revenue, $2.55 of per kilo meter driven for delivery and $13 of other charges for per item on menu.