Question

Rio Coffee Shoppe sells two coffee drinks—a regular coffee and a latte. The two drinks have the following prices and cost characteristics:

	Regular Coffee			Latte
Sales price (per cup)	$	1.80		$	2.80
Variable costs (per cup)		0.80			1.20

The monthly fixed costs at Rio are $8,432. Based on experience, the manager at Rio knows that the store sells 60 percent regular coffee and 40 percent lattes.

Required:

How many cups of regular coffee and lattes must Rio sell every month to break even?

Break-even Sales in Units Regular coffee Lattes

Answer 1

Answer:

Break-even sales (Units) = Fixed costs / Contribution per unit

Contribution per unit = Sales price per unit - Variable cost per unit

Contribution per unit for Regular coffee = $1.8 - $0.8 = $1

Contribution per unit for Latte = $2.8 - $1.2 = $1.6

Here total monthly fixed cost is $8,432

Since the store makes sales in proportion of 60% for regular coffee and 40% for Latte, the fixed cost is apportioned accordingly.

Fixed cost for Regular coffee = $8,432 * 60% = $5,059.2

Fixed cost for Latte = $8,432 * 40% = $3,372.8

Break-even sales (Units) = Fixed costs / Contribution per unit

Break-even sales (Units) for Regular coffee = $5059.2 / $1

                                                                   = 5059.2

                                                                   = 5060 units

Break-even sales (Units) for Latte = $3372.8 / $1.6

                                                    = 2108 units

Monthly Break-even units of Regular coffee and Latte:

	Break-even Sales in units
Regular Coffee	5060
Lattes	2108