Assignment:
Mixed Costs and Cost Formula
Ben Palman owns an art gallery. He accepts paintings and sculpture on consignment and then receives 20% of the price of each piece as his fee. Space is limited, and there are costs involved, so Ben is careful about accepting artists. When he does accept one, he arranges for an opening show (usually for three hours on a weekend night) and sends out invitations to his customer list. At the opening, he serves wine, soft drinks, and appetizers to create a comfortable environment for prospective customers to view the new works and to chat with the artist. On average, each opening costs $900. Ben has given as many as 20 opening shows in a year. The total cost of running the gallery, including rent, furniture and fixtures, utilities, and a part-time assistant, amounts to $105,000 per year.
Required:
1. Assume that the cost driver is number of opening shows. Develop the cost formula for the gallery's costs for a year.
2. Using the cost formula developed above, what is the total cost for Ben in a year with 12 opening shows?
3. Using the cost formula developed above, what is the total cost for Ben in a year with 14 opening shows?