1. Differentiate between fixed and variable costs.
2. Explain the meaning and significance of the contribution margin.
3. What is a PV ratio?
4. Why should managers be interested in calculating the profit break-even point?
5. Differentiate between the break-even point and the cash break-even point.

Exercise 1: Identifying Fixed and variable Costs and calculating the Contribution Margin and the PV Ratio
Answer all 6 questions.

ABC Tours is organizing a 5 day trip to Toronto. For this particular five-day trip, it will cost the ABC Tours the following:
Bus and driver $1,500/day
Marketing $5,00 (brochure and newspapers)
Meals per person/day $5.00 (4 breakfasts)
$20.00 (5 dinners)
Hotel rooms (night) $120.00 (4 nights)
Events/attractions $25.00 (per event for a total of 7 events)
Other fixed costs $1,000 Miscellaneous variable costs
$100 (per person) Price per client $1,700 Travel guide $500/day
Questions
With the above information, calculate the following:
1. Total fixed costs
2. Variable costs (per client)
3. Contribution margin (per client)
4. PV ratio
5. The number of clients needed to break-even
6. The number of clients needed if Parkway wants to generate a $5,000 profit

Answer rating: 100% (QA)

1Differentiate between fixed and variable costs Fixed costs are expenses that do not vary with the number of units produced or sold These costs remain constant regardless of the volume of business Exa... View the full answer