Question: Pineridge Kennels charges 32 per day to board a dog

Pineridge Kennels charges $32 per day to board a dog. The variable cost to feed and handle a dog is $5 per day. The fixed costs for maintaining the kennel are $160,000 per year, and the company’s income tax rate is 30%. The measure of volume is dog-days. For example, 3 dogs boarded for 4 days plus 1 dog boarded for 6 days yields 18 dog-days of service (and revenue).

A. If the firm expects an annual volume of 8,400 dog-days of boarding, what is the expected after-tax profit?
B. If the firm anticipates an annual volume of 7,200 dog-days of boarding, what is the margin of safety in terms of dog-days?
C. The owner believes that an after-tax profit of $108,000 is needed to justify being in business. How many dog-days are required to meet this goal?
D. Calculate the percentage increase in dog-days between parts (A) and (C). Then list the assumption that might no longer hold for Pineridge Kennels for the volume in part (C).
What information would you need from the owner to evaluate whether the target volume calculated in part (C) is achievable?

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  • CreatedJanuary 26, 2015
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