Question 1

Indirect costs: i) can usually be traced to a specific operation; ii) normally appear in the "Cost of Sales" section of an Income Statement; iii) tend to be associated with fixed costs; iv) tend not to change as output changes. Which of these statements are correct?
A) Only i) and ii) are correct
B) Only i) and iii) are correct
C) Only ii) and iii) are correct
D) Only iii) and iv) are correct

Accepted Answer

Indirect costs tend to be associated with fixed costs, meaning they do not change as output changes, which is described in option iv). Additionally, indirect costs typically appear in the "Cost of Sales" section of an Income Statement, which is stated in option ii). Therefore, only statement iii) is incorrect, making option D the best choice. Option A is incorrect because statement iii) is missing, and option B is incorrect because statement ii) is incorrect. Option C is incorrect because statement i) is missing.

Question 2

The price elasticity of demand for a good is 2.1. What is the percentage change in quantity demanded if there is a 3.6% rise in price?
A) 1.71% increase in the quantity demanded
B) 4.5% fall in the quantity demanded
C) 7.56% fall in the quantity demanded
D) 8.63% increase in the quantity demanded

Accepted Answer

Price elasticity of demand (Elasticity) is calculated as the percentage change in quantity demanded divided by the percentage change in price. Mathematically, 
Elasticity = (% change in quantity demanded) / (% change in price)
Here, Elasticity = 2.1, % change in price = 3.6%
So, 
% change in quantity demanded = Elasticity x % change in price
% change in quantity demanded = 2.1 x 3.6%
% change in quantity demanded = 7.56%
Therefore, the quantity demanded will fall by 7.56% if the price rises by 3.6%. Hence, the correct answer is option C.

Question 3

You are in charge of the local city-owned leisure centre and have been charged with increasing its revenue. The Mayor advises you to decrease the price of a day pass. The City Manager recommends increasing the price of a day pass. What does this tell you about their understanding of price elasticity of demand?
A) The Mayor thinks the demand is elastic and the City Manager thinks the demand is inelastic
B) The mayor think sthe demand is inelastic and the City Manager thinks demand is elastic
C) Nothing - demand may be more or less elastic, but this has no bearing on the issue in question

Accepted Answer

The Mayor's recommendation to decrease the price of a day pass suggests that they believe the demand for the leisure centre is elastic, meaning that a small change in price will result in a large change in demand. On the other hand, the City Manager's recommendation to increase the price of a day pass suggests that they believe the demand for the leisure centre is inelastic, meaning that a change in price will have little effect on demand. Therefore, the best choice is A.

Question 4

A company has fixed costs of €185,000 and variable costs of €10 per unit. What are the costs per unit if: i) 25,000 units are produced and ii) 65,000 units are produced?
A) i) €17.40 and ii) €12.85
B) i) €19.56 and ii) €15.32
C) i) €25.50 and ii) €18. 37
D) i) €28.42 and ii) €22.96

Accepted Answer

For i) Total cost = Fixed costs + (Variable cost per unit * Number of units) = €185,000 + (€10 * 25,000) = €435,000. Cost per unit = Total cost / Number of units = €435,000 / 25,000 = €17.40. For ii) Total cost = €185,000 + (€10 * 65,000) = €835,000. Cost per unit = €835,000 / 65,000 = €12.85.

Question 5

A small family-run, 60-room hotel is open all the year round.  Variable costs per guest are $ 15 and total annual overhead $ 1.6 million. Rooms division absorbs 60% of the overheads and occupancy is expected to be 55%. If the hotel has a desired mark up of 35%, how much would they charge for a room?
A) $ 128
B) $ 137.50
C) $ 152
D) $ 160

Accepted Answer

Explanation:Rooms division overhead = 60% of $ 1.6 million = $ 960,000Fixed cost per room = $ 960,000 / 60 rooms = $ 16,000Variable cost per room = $ 15Total cost per room = $ 16,000 + $ 15 = $ 16,015Selling price per room = $ 16,015 / (1 - 35%) = $ 128

Question 6

One year a restaurant sells 83,000 meals at an average price of $ 21. If variable costs are $ 12 and fixed costs $ 529,000, what is the contribution?
A) $ 218,000
B) $ 348,000
C) $ 747,000
D) $ 996,000

Accepted Answer

The answer of One year a restaurant sells 83,000 meals...

Question 7

An overhead expense of $ 535,000 is allocated to three departments A, B and C as 1.5 : 2.0 : 3.5. respectively. How much would be allocated to department B?
A) $ 152,857
B) $ 161,997
C) $ 166,558
D) $ 178,333

Accepted Answer

The total ratio is 1.5 + 2.0 + 3.5 = 7.0. Department B's share is 2.0/7.0 of the total expense. So, $535,000 * (2.0/7.0) = $152,857.14, which rounds to $152,857.

Question 8

Use the table below to answer the question. All numbers in local currency. Assume indirect costs are allocated according to the value of equipment in each department. Cleaning has 75,000 worth of equipment and Catering has 300,000. That would mean: $$\begin{array} { | l | l | l | l | } 
\hline & \text { Cleaning } & \text { Catering } & \text { Total } \
\hline \text { Sales Revenue } & 195,000 & 455,000 & 650,000 \
\hline \text { Direct costs } & 165,000 & 300,000 & 465,000 \
\hline \text { Contribution } & & & \
\hline \text { Indirect Costs } & & & 105,000 \
\hline \text { Operating Income } & & & \
\hline
\end{array}$$
A) Catering makes a profit of 65,000 and Cleaning makes a profit of 15,000.
B) Catering makes a profit of 71,000 and Cleaning makes a profit of 9,000.
C) Catering makes a profit of 76,700 and Cleaning makes a profit of 3,300.
D) Catering makes a profit of 85,200 and Cleaning makes a loss of 5,200.

Accepted Answer

Contribution = Sales Revenue - Direct CostsCleaning Contribution = 195,000 - 165,000 = 30,000Catering Contribution = 455,000 - 300,000 = 155,000Indirect Costs allocated to Cleaning = 105,000 * (75,000 / 405,000) = 20,250Indirect Costs allocated to Catering = 105,000 * (300,000 / 405,000) = 84,750Cleaning Operating Income = 30,000 - 20,250 = 9,750Catering Operating Income = 155,000 - 84,750 = 70,250

Question 9

A company has the following estimated costs for the next financial year (see table). The firm estimate they will produce and sell 140,000 units in the next financial year.  If they use a Variable Cost Mark-Up of 80%, what will their selling price be? $$\begin{array} { | l | l | } 
\hline \text { Direct materials } & 1,300,000 \
\hline \text { Direct labour } & 2,195,000 \
\hline \text { Mortgage Repayments } & 725,000 \
\hline \text { Property Taxes } & 245,000 \
\hline \begin{array} { l } 
\text { General Headquarters \& Administration } \
\text { Expenses }
\end{array} & 765,000  \
\hline \text { Other Overhead Expenses } &580,000 \
\hline \text { Other Variable Costs } &460,000  \
\hline
\end{array}$$
A) 50.85
B) 68.44
C) 76.75
D) 91.68

Accepted Answer

Variable Cost Mark-Up = (Variable Costs / Units) x (1 + Mark-Up %)= ((1,300,000 + 2,195,000 + 460,000) / 140,000) x (1 + 80%)= (3,955,000 / 140,000) x (1 + 80%)= 28.25 x (1 + 80%)= 28.25 x 1.8= 50.85

Question 10

The Queen's Arms Hotel's year-end sales and costs figures are in the table - all in local currency. The owner wants to close during low season, but the assistant manager suggests keeping open is better. Who is right? $$\begin{array} { | l | l | l | l | } 
\hline & 9 \text { months } & 3 \text { months } & \text { Total } \
\hline \text { Sales } & 450,000 & 50,000 & 500,000 \
\hline \text { Direct costs } & 200,000 & 22,000 & 222,000 \
\hline \text { Contribution } & 250,000 & 28,000 & 278,000 \
\hline \text { Indirect costs } & 170,000 & 30,000 & 200,000 \
\hline \text { Operating income } & 80,000 & 2,000 & 78,000 \
\hline
\end{array}$$
A) The assistant manager is right, as closing for the 3-month low season would cause total operating income to fall to 50,000
B) The assistant manager is right, as closing for the 3-month low season would cause total operating income to fall to 20,000.
C) The owner is right, as closing for the 3-month low season would cause total operating income to rise to 80,000
D) The owner is right, as closing for the 3-month low season would cause total operating income to rise to 250,000

Accepted Answer

From the table, we can see that the total operating income for the year is 78,000. If the hotel were to close during the 3-month low season, the sales and direct costs would both decrease by 50%. This would result in sales of 25,000 and direct costs of 11,000, leaving a contribution of 14,000. However, the fixed indirect costs would remain, resulting in a total operating income of only 2,000 for the 3-month period. Adding this to the operating income for the 9-month high season, we get a total operating income of 80,000, which is less than the total operating income for staying open all year (78,000). Therefore, the assistant manager is right and the hotel should stay open during the low season.

Question 11

Which of the following types of costs is generally allocated among different revenue generating departments (or cost centres)?
A) overhead costs
B) incremental costs
C) discretionary costs
D) step costs

Accepted Answer

Overhead costs are generally indirect costs that cannot be directly traced to a specific product or service. These costs are usually allocated among different revenue generating departments or cost centres based on a predetermined allocation method.

Question 12

A restaurant uses the Desired Ingredient Cost Mark-Up (DICMU) method of menu pricing. They have a policy of ensuring that for all meals ingredients cost 12.5% of the overall menu price. The table has the purchase prices of a beef dish (all in local currency). What price will the restaurant charge for this meal?
A. 5.6
B. 18.1
C. 44.8
D. 70

Accepted Answer

The answer of A restaurant uses the Desired Ingredient Cost...

Question 13

What is the Hubbart Formula?
A) A pricing method which starts with the desired ingredient cost mark up and works forwards to calculate the price of the item.
B) A pricing method which starts with the desired amount of profit and works backwards to calculate the average room rate.
C) A pricing method which starts with the view that consumers assume certain price levels are associated with particular quality standards.
D) A pricing method which starts with the assumption that the level of competition is of paramount importance when establishing the price of a hotel room.

Accepted Answer

The Hubbart Formula is a pricing method that starts with the desired amount of profit and works backwards to calculate the average room rate. It takes into account the hotel's fixed costs, variable costs, and desired profit margin to determine the ideal price for a room.

Question 14

A hotel's owners desire a return of 20% (after tax) on their investment of 10 million dollars. If corporation tax is 37.5%, what is the required income before tax?
A) 0.75 million
B) 2 million
C) 3.2 million
D) 6.25 million

Accepted Answer

To calculate the required income before tax, we need to first calculate the after-tax return that the hotel owners desire.

If they want a 20% return after tax, then the pre-tax return they require is:
20% / (1 - 37.5%) = 32%

Now, we can calculate the required income before tax:
$10 million x 32% = $3.2 million

Therefore, the best choice is C) 3.2 million.

Question 15

How are hotel rooms 'perishable goods'?
A) Distribution partners such as OTAs get allocated a limited number of rooms.
B) A guest room needs a major refurbishment investment every 7 to 10 years.
C) You only have 24 hours a day to sell it at the best rate possible.

Accepted Answer

Hotel rooms are considered perishable goods because if they are not sold within a specific timeframe (in this case, a day), the opportunity to generate revenue from them is lost forever. Unlike physical goods that can be stored and sold at a later date, an unsold hotel room represents lost potential income for that specific day, which cannot be recovered.

Quiz 3: Pricing

Indirect costs: i) can usually be traced to a specific operation; ii) normally appear in the "Cost of Sales" section of an Income Statement; iii) tend to be associated with fixed costs; iv) tend not to change as output changes. Which of these statements are correct?

The price elasticity of demand for a good is 2.1. What is the percentage change in quantity demanded if there is a 3.6% rise in price?

A company has fixed costs of €185,000 and variable costs of €10 per unit. What are the costs per unit if: i) 25,000 units are produced and ii) 65,000 units are produced?

A small family-run, 60-room hotel is open all the year round. Variable costs per guest are $ 15 and total annual overhead $ 1.6 million. Rooms division absorbs 60% of the overheads and occupancy is expected to be 55%. If the hotel has a desired mark up of 35%, how much would they charge for a room?

One year a restaurant sells 83,000 meals at an average price of $ 21. If variable costs are $ 12 and fixed costs $ 529,000, what is the contribution?

An overhead expense of $ 535,000 is allocated to three departments A, B and C as 1.5 : 2.0 : 3.5. respectively. How much would be allocated to department B?

Which of the following types of costs is generally allocated among different revenue generating departments (or cost centres) ?

What is the Hubbart Formula?

A hotel's owners desire a return of 20% (after tax) on their investment of 10 million dollars. If corporation tax is 37.5%, what is the required income before tax?

How are hotel rooms 'perishable goods'?