The university’s Wildcat Lair caters to students and serves sandwiches and beverages. It has been reporting losses in past months. In July, for example, the loss was $5,000.

The Lair purchases prepared food directly from University Food Services. This charge varies proportionately with the number and kind of meals served. Personnel who are paid by the Lair serve the food, tend the cash register, bus and clean tables, and wash dishes. The staffing levels in the Lair rarely change; the existing staff can usually handle daily fluctuations in volume. Administrative costs are primarily the salaries of the Lair manager and her office staff. Because the university provides support services for the Lair, such as payroll, human resources, and other administrative support, the university charges a surcharge of 10% of its revenue. Utility costs are the costs of cooling, heating, and lighting the Lair during its normal operating hours.

The university’s management is considering shutting the Lair down because it has been operating at a loss.

REQUIRED

A. List the fixed expenses of the Wildcat Lair.

B. List the variable expenses of the Wildcat Lair and the most likely cost driver for each expense.

C. Write out the cost function for running the Wildcat Lair.

D. Estimate the profit or loss for August if the revenues of the Lair increase to $80,000.

E. Explain why the original data show a loss but part (D) shows a profit. Be specific.

F. What is the university’s opportunity cost if it closes the Wildcat Lair? Describe the opportunity cost and provide calculations for July and August.

Transcribed Image Text:

$70,000 Revenue Expense Purchases of prepared food Serving personnel Cashier Administration University surcharge Utilities $21,000 30,000 5,500 10,000 7,000 1,500 75,000 $ (5,000) Loss