Cost-Profit Volume Opening Story: Fleet Skating Center 1. Break even point occurs when the level of sales at which profit is zero. If enough skaters visit the outdoor ice skating rink to generate 115,000 ( $100,000 + $15,000) in contribution margin, then all of the fixed cost will be covered and the company will have managed to at least break even-that to show neither profit nor loss but just cover all of its costs. This will keep critics of the skating center quite.
2. In order for Fleet Skating Center to break even in sales, the contribution margin must equal to fixed cost ($115,000). If contribution margin equals 115,000 then net income would be 0. This shows that neither profit or loss but just cover all its cost Contribution margin "ÃÂ¦"ÃÂ¦"ÃÂ¦"ÃÂ¦. 115,000 Less fixed expenses "ÃÂ¦"ÃÂ¦"ÃÂ¦"ÃÂ¦"ÃÂ¦.. 115,000 Net Income "ÃÂ¦"ÃÂ¦"ÃÂ¦"ÃÂ¦"ÃÂ¦"ÃÂ¦"ÃÂ¦ -0- *Assume that each skater pays $8.00 per ticket ( Contribution margin (Per Skater) = 115,000/82,500 = 1.39
Variable cost per unit is: 8- 1.39 = $6.61 3. When we say the cost is variable, we mean it variable with respect to the volume generating output. In this case, the operating expenses and the cost of equipment will be expected to go up as activities change. If the company is profitable, the sale volume will also increase.
At the result, I conclude that, incline skating rink, street hockey, dances, or any other activities cause changes in variable cost, especially the costs that I mentioned above. Other variable costs are: utilities cost and cost of labors.
$100,000 debt service and the season $15,000 administration fee paid to the company managing the rink will remain fixed. Other remaining fixed costs are rent, depreciation of equipment, property taxes, and insurance. ( Note: rent, depreciation, taxes and insurance are not listed in the opening story, but I think every businesses pay rent, taxes and insurance, therefore I assume these costs remain fixed) 4. Relevant range is the range of activity within which the assumptions about variable cost and fixed cost are valid. If there is a big enough change in activity, the fixed costs may change. In this case, if more skaters visit Fleet Skating Center, another staking center might have to be built. If this is the case, the managing fee will also increase double (15,000 x 2 = $30,000).
5. It's a fixed cost within a relevant range. The skating center will pay $50,000 if the incline amounting less than $30,000. If there is change in activity, the fixed cost may change. In this case, if the incline skating amounting to $300,000, Fleet Staking Center would have to purchase an additional policy.