Reference no: EM1311398

Redrafting contribution Margin statements.

Austin's Shooters, Inc. operates a paintball course where customers can come to play paintball games and stage organized matches with their friends. Their accountant, Denny Dinsdale, has produced an income statement (presented below) depicting their first year's operating data in the contribution margin format. The news is not good, given the loss of $30,000. However, Denny explains that this is the reason that the presentation is in this format. That is, Austin Douglas, the owner and manager of Austin's Shooters, Inc. can use the statement to determine what will happen next year given changes in volume.

Income Statement For the Year Ended December 31, 2004
Revenue:
Admission fees (1,600 shooters)	$80,000
Supplies and Concessions	$24,000
Total Revenue ($65 per unit)	$104,000
Variable Costs:
Cost of supplies & Concessions Sold	$14,000
Electricity (purchased per KWH)	$30,000
Wages of Games Coordinators (DL)	$40,000
Liability Insurance (based on # of customers)	$10,000
Total Variable Costs	$94,000
Contribution Margin	$10,000
Fixed Costs:
Depreciation - Bldg & Fixtures	$12,000
Advertising	$3,000
Heat and Light for Bldg.	$5,000
Property Taxes	$20,000
Total Fixed Costs	$40,000
Operating Income	$<30,000>

After careful review, Austin tells Denny that the classifications are not all correct. Austin enumerates three issues as follows:

1. Electricity cost is only for lighting a rather large area of land for play at night and is always on after sunset regardless of how many shooters are on site. 
2. Although the wages of games coordinators are hourly, they are required to be present during all working hours to help ensure the safety of the shooters. Number of workers is adequate for up to 4,000 customers annually.
3. Since the liability insurance amount is based on number of shooters it does vary with volume, but it only increases for increments of every additional 5,000 shooters. Volume is expected to increase to 2,500 shooters next year, but 5,000 shooters clearly exceed the relevant range of expected operations for the foreseeable future.

Denny has assured Austin that the information is accurate and that the expenses are properly classified.

After entertaining Austin's arguments, Denny claims that he was taught in managerial accounting that direct labor (DL) and electricity are always variable costs. This is because workers are paid hourly and electricity is purchased as used per month (i.e., per KWH). How would you support Denny's view? How would you support Austin's view?