Former NFL coach Joe Gibbs is highly sought after as a guest speaker. His fee can run as high as $100,000 for a single two-hour appearance. Recently, he was asked to speak at a seminar offered by the National Sports in Education Foundation (NSEF).
Due to the charitable nature of the organization, Mr. Gibbs offered to speak for $75,000. NSEF planned to invite 250 guests who would each make a $500 contribution to the organization. The Foundation's executive director was concerned about committing so much of the organization's cash to this one event. So instead of the $75,000 fee she countered with an offer to pay Mr. Gibbs 50% of the revenue received from the seminar and no other payments.
(a) Classify the two offers in terms of cost behavior (fixed vs. variable).
Scenario A, NSEF pays Welch a $75,000 fee:
Scenario B, NSEF pays Welch 50% of revenue:
(b) Compute the budgeted income (assuming there are no other expenses) under each of the following scenarios:
1) NSEF agrees to pay the $75,000 fee, and 250 guests actually attend the seminar; and
2) NSEF pays Mr. Gibbs 50% of revenue, and 250 guests attend the seminar.
(c) For each scenario ($75,000 fee vs. 50% of revenue), compute the percentage increase in profit that would result if the Foundation is able to increase attendance by 20 percent over the original plan (to a total of 300).
(d) For each scenario, compute NSEF's cost per contributor if 250 attend and if 300 contributors attend.
(e) Summarize the impact on risk and profits of shifting the cost structure from fixed to variable costs.
Heidelburg Company produces and sells grandfather clocks. Its current sales are $250,000. The company's accountant provided the following cost information:
manufacturing cost $60,000+40% of sales
selling costs $15,000+10% of sales
Administrative cost $18,000+10% of sales
1) Compute the product's contribution margin ratio.
2) Compute the company's current net income.
3) Compute the product's break-even point in dollars.
4) Compute the amount of revenue necessary to earn $60,000 in profit.
5) Compute the company's current margin of safety ratio.
6) Should the company accept a proposal that increases sales by 20% and total fixed costs by 25%?
Solution is in attached excel for you.
Click on cells to see computations.