Question

Answer the following questions using the information below: Southwestern College is planning to hold a fund raising banquet at one of the local country clubs. It has two options for the banquet: OPTION one: Crestview Country Club a. Fixed rental cost of $1,000 b. $12 per person for food OPTION two: Tallgrass Country Club a. Fixed rental cost of $3,000 b. A caterer who charges $8.00 per person for food Southwestern College has budgeted $1,800 for administrative and marketing expenses. It plans to hire a band which will cost another $800. Tickets are expected to be $30 per person. Local business supporters will donate any other items required for the event. 12. Which option provides the least amount of risk? A) Option one B) Option two C) Both options provide the same amount of risk. D) Option one is risk-free 13. Which option has the lowest breakeven point? A) Option one B) Option two C) Both options have the same breakeven point. D) The lowest breakeven point cannot be determined. 14. Which option provides the greatest operating income if 600 people attend? A) Option one B) Option two C) Operating incomes are identical. D) Both the options have 0 operating income as they are operating at breakeven point.

Answer 1

Solution 12:

Option one provides least amount of risk as it involve lowest fixed costs. Hence option A is correct.

Solution 13:

Total fixed cost under option 1 = $1,000 + $1,800 + $800 = $3,600

Total fixed cost under option 2 = $3,000 + $1,800 + $800 = $5,600

Contribution margin per ticket under option 1 = $30 - $12 = $18

Contribution margin per ticket under option 2 = $30 - $8 = $22

Breakeven point under option 1 = Fixed cost / contribution margin per person = $3,600/ $18 = 200 person

Breakeven point under option 2 = $5,600/22 = 255 person

Option one provide lowest breakeven point

Hence option A is correct.

Solution 14:

Operating income under option one = Contribution margin - Fixed costs = (600*$18) - $3,600 = $7,200

Operating income under option two = (600*$22) - $5,600 = $7,600

Hence option two provides greatest operating income

Hence option B is correct.