Solution6.2

Solution 6.2

a) Present the above information in a marginal costing profit statement format.

Marginal Costing Profit Statement
		€
Sales		4300

Less Variable costs
	COGS	500
	Payroll	460
	UOE	130
Total Variable costs		1,090
Contribution		3,210

Less Fixed costs
	Fixed charges	700
	Payroll	1040
	UOE	_800
		2540
Net profit		_670

b) Calculate the profit multipliers of the hotel based on a 10 per cent change

The approach here is as follows.

Prepare a separate revised profit statement based on a percentage change in each variable.
Calculate the percentage change in profit compared to original profit.
Divide the percentage change in profit by the percentage change in the variable which in this case is 10%

		Sales	Sales	Variable	Fixed
		Price	Volume	Costs	Costs
		€	€	€	€
Sales		4730	4730	4300	4300

Less Variable costs
	COGS	500	550	550	500
	Payroll	460	506	506	460
	UOE	130	143	143	130
Total Variable costs		1090	1199	1199	1090
Contribution		3640	3531	3101	3210

Less Fixed costs
	Fixed charges	700	700	700	770
Payroll		1040	1040	1040	1144
UOE		800	800	800	880
		2540	2540	2540	2794
Net profit		1100	991	561	416


1. % change in Net profit		0.641791	0.479104	-0.16269	-0.3791
2. % change in key variable		0.1	0.1	0.1	0.1
3. Profit Multiplier		6.41791	4.791045	-1.62687	-3.79104

c) Rank the multipliers in terms of their influence on profit.

1)	Sales price 6.42
2)	Sales Volume 4.79
3)	Fixed costs 3.79
4)	Variable costs 1.63

d) Comment on the profit multipliers calculated

The profit multiplier profile of the business suggests that profit is more sensitive to the revenue side of the profit and loss account than the cost side. Thus greater emphasis should be place on maximising sales and revenues while at the same time controlling costs. This business would be classified as a high fixed operating cost structure with fixed costs amounting to 70% of the total operating costs of the business. The profit multipliers would indicate that the business is more market oriented than cost oriented due to the high fixed operating cost structure and thus high operating risk. Also the fact that the business is a hotel which deals with a perishable product and is capital intensive means that the business should be more market oriented while at the same time controlling costs.