Question

3. Greyjoy Ltd operates a package holiday company in Cardiff. The company has a reliable budgeting process from which the following information has been obtained: Sales of holidays (units) May 500 June 800 July 1000 Costs: Staff Salaries Food Administration costs Repairs and maintenance Depreciation on office equipment Hotel costs Office rent Agents' commission £ 196,000 196,000 7,500 12,000 40,000 40,000 40,000 64,000 20,000 20,000 75,000 102,000 28,000 28,000 27,000 42,000 £ 196,000 15,000 40,000 80,000 20,000 120,000 28,000 52,000

Answer 1

A) Calculation of Semi variable cost ( Using Linear cost equation)
First of all, we need to find out which cost is semivariable
	May	June	July	Remarks
Sale of holidays (Units)	500	800	1000
Costs
Staff salary	$ 196,000.00	$ 196,000.00	$ 196,000.00	Fixed Cost
Food	$      7,500.00	$    12,000.00	$    15,000.00	Variable cost
Cost Per unit for food	15	15	15
Administration cost	$    40,000.00	$    40,000.00	$    40,000.00	Fixed Cost
Repaire and maintenance	$    40,000.00	$    64,000.00	$    80,000.00	Variable cost
Cost Per unit for repaire	80	80	80
Depreciation	$    20,000.00	$    20,000.00	$    20,000.00	Fixed Cost
Hotel Costs	$    75,000.00	$ 102,000.00	$ 120,000.00	Semi Variable
Cost Per unit for hotel Cost	150	127.5	120
Office Rent	$    28,000.00	$    28,000.00	$    28,000.00	Fixed Cost
Agent commission	$    27,000.00	$    42,000.00	$    52,000.00	Semi Variable
Cost Per unit for Agent commission	54	52.5	52
So as per the above table Cost of hotel and cost of agent commission are semi variable cost.
With the use of Linear cost equation Semi Variable cost is
Y= a + bx
Where
Y= Total Cost
a = Fixed Cost
B =variable cost
x = No. of unit
For hotel Cost first equation is 75000 = a+500b
For hotel Cost second equation is 102000 = a+800b
We equate both the euqation
75000-102000= a-a+500b-800b
-27000=-B300
B= 27000/300 = 90 Per unit
So the fixed cost is 75000=a-90*500
Fixed cost(A) = 75000-45000 = 30000
So variable cost in Hotel cost is $90/- Per unit
So Fixed cost in Hotel cost is $30000
Calculation of semi variable cost for agent commission
For Agent Commission first equation is 27000 = a+500b
For Agent Commission second equation is 42000 = a+800b
We equate both the euqation
27000-42000= a-a+500b-800b
-15000=-B300
B= 15000/300 = 50 Per unit
So the fixed cost is 27000=a-50*500
Fixed cost(A) = 27000-25000 = 2000
So variable cost in Agent Commission is $50/- Per unit
So Fixed cost in Agent Commission is $2000
B) Expected budget for 1400 units
	Cost per unit	Total Cost
Staff salary		$ 196,000.00
Food	15	$    21,000.00
Administration cost		$    40,000.00
Repaire and maintenance	80	$ 112,000.00
Depreciation		$    20,000.00
Hotel Costs
- Fixed cost		$    30,000.00
- Variable cost	90	$ 126,000.00
Office Rent		$    28,000.00
Agent commission
- Fixed cost		$      2,000.00
- Variable cost	50	$    70,000.00
Total Estimated Cost for 1400 units		$ 645,000.00

C) if the company increase 100% demand then company might face below issues :

i)Underestimate the dependencies on the cost,

ii)Ignoring the facts that we cannot change,

iii)low availabilty of the material may be material cost might be increased by the vendors,

iv)Treating fixed cost as fix in all the cases it will increase if we increase the production for example depreciation if we increase the production then we have to install new machinery because of that depreciation will increase.

v) Due to benifits of learning curves we can reduce the variable cost related to workers.For example wages