A famous skateboarder is planning on opening a new indoor skateboard facility in Athens. He wants to name the skate park “Accounting Central” because a lot of accountants are skaters as well. Accounting Central will us a membership model to generate revenue, allowing customers to purchase a monthly membership and gain unlimited access to the park. When operating, Accounting Central is estimated to have $650,000 in assets. Shareholders are anticipating receiving a 15% return on the assets as operating income. The facility’s annual fixed costs are expected to be $96,000. The variable costs per skater are estimated to be $15 per month. After analyzing the market, Accounting Central believes it can sell 150 memberships in the first month. Furthermore, the company has noted that a number of other skaters have started similar skate-parks in the area, leading to high competition in the area. Which of the following statements is incorrect regarding the company’s first month of operations assuming a sales price of $120 per membership? A. Accounting Central is considered to be a price taker in the Athens market. B. Holding all other variables constant, if the company reduces fixed costs by $375 per month, the company will meet its target monthly operating income. C. If the company decided to leave all operations as they currently stand, shareholders would be content with the operating profit achieved. D. Total monthly target costs for the company are $9,875. E. Holding all other variables constant, if the company reduces variable costs to $12.50 per skater, the company will meet its target monthly operating income.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter16: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 31P

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A famous skateboarder is planning on opening a new indoor skateboard facility in Athens. He wants to name the skate park “Accounting Central” because a lot of accountants are skaters as well. Accounting Central will us a membership model to generate revenue, allowing customers to purchase a monthly membership and gain unlimited access to the park. When operating, Accounting Central is estimated to have $650,000 in assets. Shareholders are anticipating receiving a 15% return on the assets as operating income. The facility’s annual fixed costs are expected to be $96,000. The variable costs per skater are estimated to be $15 per month. After analyzing the market, Accounting Central believes it can sell 150 memberships in the first month. Furthermore, the company has noted that a number of other skaters have started similar skate-parks in the area, leading to high competition in the area. Which of the following statements is incorrect regarding the company’s first month of operations assuming a sales price of $120 per membership? A. Accounting Central is considered to be a price taker in the Athens market. B. Holding all other variables constant, if the company reduces fixed costs by $375 per month, the company will meet its target monthly operating income. C. If the company decided to leave all operations as they currently stand, shareholders would be content with the operating profit achieved. D. Total monthly target costs for the company are $9,875. E. Holding all other variables constant, if the company reduces variable costs to $12.50 per skater, the company will meet its target monthly operating income.

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