Question

The ArizonaArizona State Fair is one of the largest state fairs in the United States. It draws nearly one million visitors over the fifteenfifteen​-day period each July and August. The fair is a​ non-profit organization. It is​ self-supporting and​ needs, at a​minimum, to break even by generating revenues through various activities. Among the sources of revenue for The ArizonaArizona State Fair are the revenues generated from the food vendors. A number of food vendors offer a wide variety of fair foods to​attendees, including funnel​ cakes, gyros, cotton​ candy, milkshakes, and corn dogs.

Assume the following schedule of fees for food vendors at the ArizonaArizona State​ Fair:

•​$88per linear foot for ground service fees​ (front footage x​ depth)

•18​%of concessions​ (food sales)

•​$35 per 15​-dayparking permit

•$330for​ 100-amp electrical service

•​$60 per 15​-day fair admittance pass​ (one is included with basic rental​agreement)

Cosmic Concessions is a vendor at the fair. It has a food booth that requires 10 feet of front frontage and is 17 feet deep.Cosmic Concessions expects to have sales averaging $6,500 per day for each of the 15 days of the fair. It has a total of three employees who will work the fair throughout the entire 15​-day period. CosmicCosmic pays for each​employee's fair admission and parking. Assume that the employee wages for the 15​-day period are expected to total $8,085.

requirements

1.

Of the fees listed in the​ schedule, which fees are variable with respect to the number of customers at the​ booth? Which fees are​ fixed?

2. What is the projected total fee that Cosmic Concessions will need to pay to The Arizona State Fair assuming it meets its expected sales level for each of the 15 days of the​ fair?

3.Assume that variable costs are 60​% of sales revenue.​ (This 60​% includes the 18​% concession fee charged by The Arizona State​ Fair.) How much in total sales revenue is needed forCosmicConcessions to break​ even? 4.Calculate Cosmic Concessions' margin of safety both in dollars and percentage.

Answer 1

1.

Ground service fees	Fixed
Concessions (food sales)	Variable
Parking permit	Fixed
Electrical service	Fixed
Fair admittance pass	Fixed

2.

Ground service fees (10 x 17 x $88)	14960
Concessions (18% x $6500 x 15)	17550
Parking permit ($35 x 3)	105
Electrical service	330
Fair admittance pass ($60 x 2)	120
Projected total fee $	33065

3. Break-even sales revenue = Total fixed costs/Contribution margin ratio

Total fixed costs = Fixed fees + Employee wages = ($33065 - $17550) + $8085 = $23600

Contribution margin ratio = 100% - 60% = 40%

Break-even sales revenue = $23600/40% = $59000

4. Margin of safety = Actual sales - Breakeven sales = ($6500 x 15) - $59000 = $97500 - $59000 = $38500

Margin of safety percentage = Margin of safety/Actual sales = $38500/$97500 = 39.49%

Note: The margin of safety percentage is rounded off to 2 decimal places.