Question

4) The Cambridge School District is planning to operate a school lunch program in its new high school, which will be opening this coming fall.  The school superintendent is attempting to prepare a budget (estimate of revenues and expenses) for the program.  The superintendent has developed this preliminary information on the lunch program:

Revenues per lunch served:                                     $2.00

Variable costs per lunch served:

            Food                                                               $1.18

            Miscellaneous supplies                                                 .02

                        Total variable cost per lunch                       $1.20

Fixed costs (per year) of lunch program:

            Depreciation on kitchen equipment                                                            $ 5,000

            Electricity                                                                                                2,800

            Wages (1 food service director and 3 cooks)                                                                                              137,000

                        Total fixed costs                                                                    $144,800

Estimated volume per year: 1,500 students x.60 participation rate x 180 days = 162,000 lunches.

Assuming that a linear break even model is an appropriate representation of the cost and revenue relationships:

What is the break-even volume in number of lunches per year?

What is the surplus (or deficit) at the estimated volume per year?

            

5) The Waveland Cookie Company was looking for ways to improve its profits.  It was felt that a good place to look for cost savings was to improve its inventory management.  The first place they looked was at the procurement of chocolate for their chocolate chip cookies.

They determined that they used 4805 pallets each year at a constant rate throughout the year.  It costs WCC $100 each time it places an order.  A pallet of chocolate costs $50.  Because of the special handling required the cost of holding its chocolate inventory is 20 percent of its average value.  It normally takes 5 days to receive an order once it is placed.

How many pallets should they order each time they order to minimize the total cost of inventory?

When should they reorder more pallets of chocolate?

Answer 1

	What is the break-even volume in number of lunches per year?
	Break Even Volume = Total Fixed costs/Contribution margin per unit
			$144800/($2-$1.20)
			181000.00
	Break Even Volume		181000
	What is the surplus (or deficit) at the estimated volume per year?
	Sales	(162000*2)		324000
	Less : Variable cost	(162000*1.20)		194400
	Contribution Margin			129600
	Less : Fixed Costs			144800
	Deficit			-15200
	Deficit of $ 15200
	Q = (2RS/PC)^1/2
	((2*4805*20)/(50*0.20))^(1/2)
	138.6362146
	139 Pallets
	ROP = (4805/360)*5
	66.73611111
	67 Days