Applying Cost Behavior Concepts to Business Decisions Art On Tour, Inc. (AOTI) c

Question

Applying Cost Behavior Concepts to Business Decisions Art On Tour, Inc. (AOTI) contracts with artists lo exhibit their work to the public. AOTI has agreed to pay a well known artist a $20.000 commission for the right to exhibit his work for one month. Required Identifying Cost Behavior Determine the total commission cost and the commission cost per person if    1,000,   2,000, or 4,000 people attend the exhibition. Is the commission cost fixed or variable? AOTI sells to patrons hooks illustrating use artist's work. The books cost AOTI $5 each Determine the total cost of hooks and the cost per person if 1,000, 2,000, or 4,000 people attend the exhibition and wish to purchase the books. Is the book cost fixed or variable? Operating Leverage and Risk/Reward Relationship AOTI pays an artist a $20,000 commission. It sells 4,000 tickets at $6 each. Prepare an income statement. Then prepare revised income statements assuming 10 percent more than 4,000 and 10 percent fewer than 4,000 patrons attend the exhibition. Calculate the percentage changes in revenue and net income if attendance increases or decreases 10 percent. Alternatively, AOTI pays the artist a commission of $5 per ticket sold. It sells 4,000 tickets at $6 each Prepare an income statement. Then prepare revised income statements assuming 10 percent more than 4,000 and 10 percent fewer than 4,000 patrons attend the exhibition. Calculate the percentage change in revenue and net income if attendance increases or decreases 10 percent. Fixed and Variable Cost Definitions are Context Sensitive AOTI pays the artist a commission of $20,000 per exhibition. What is the total commission cost and the commission cost per person if 1,000, 2,000, or 4,000 people attend the exhibition? AOTI pays the artist a commission of $20,000 per exhibition. What is the total commission cost and the commission cost per exhibition if AOT I sponsors 1, 2, or 3 exhibitions?

Explanation / Answer

Answer. Part a. 1. Total Commision Cost = $20,000 Commision Cost (A)            20,000           20,000          20,000 People Visited the exhibition (B)              1,000              2,000            4,000 Commision Cost Per Person (A/B)                    20                    10                     5 Commission Cost is Fixed Cost Answer. Part a. 2. Cost Per Book (A)                      5                      5                     5 People Visited the exhibition (B)              1,000              2,000            4,000 Total book Cost (A X B)              5,000           10,000          20,000 Book Cost - Variable Cost (Cost Changes as changes in the level of Sales / production) Answer. Part b. 1. Income Statement Revenue Sale of Ticket - 4000 Tickets X $6            24,000 Less: Expenses Artist Commision         (20,000) Net Operating Income              4,000 Income Statement Original Option A Option B Amt Difference % Amt Difference % Attendance in Nos.              4,000              4,400                400 3600 Sale of Ticket -            24,000           26,400            2,400 10%      21,600          (2,400) -10% Less: Expenses Artist Commision         (20,000)         (20,000)                   -   0%    (20,000)                   -   0% Net Operating Income              4,000              6,400            2,400 60%         1,600          (2,400) -60% Answer Part b. 2. Income Statement Revenue Sale of Ticket - 4000 Tickets X $6            24,000 Less: Expenses Artist Commision - 4000 Tickets X 5         (20,000) Net Operating Income              4,000 Income Statement Original Option A Option B Amt Difference % Amt Difference % Attendance in Nos.              4,000              4,400                400 3600 Sale of Ticket -            24,000           26,400            2,400 10%      21,600          (2,400) -10% Less: Expenses Artist Commision         (20,000)         (22,000)          (2,000) 10%    (18,000)            2,000 -10% Net Operating Income              4,000              4,400                400 10%         3,600              (400) -10% Answer.Part c.1 Total Commision Cost = $20,000 Commision Cost (A)            20,000           20,000          20,000 People Visited the exhibition (B)              1,000              2,000            4,000 Commision Cost Per Person (A/B)                    20                    10                     5 Answer.Part c.2 Artist Comm. Cost per Exhibition            20,000           20,000          20,000 No. of exhibition                      1                      2                     3 Total Commission Cost            20,000           40,000          60,000

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