Question

3.14 (LO 1, 2, 3) Breakeven analysis; target operating income; CVP graph Wimpee’s Hamburger Stand sells the Super Tuesday Burger for $4.00. The variable cost per hamburger is $2.25; total fixed cost per month is $38,500.

Required

1. How many hamburgers must Wimpee’s sell per month to break even?
2. How many hamburgers must Wimpee’s sell per month to make $10,500 in operating income?
3. Prepare a CVP graph for Wimpee’s.
4. Assuming that the most hamburgers Wimpee’s has ever sold in a month is 24,000, how likely is Wimpee’s to achieve a target operating income of $10,500? What actions could Wimpee’s manager take to increase the chances of reaching that target operating income?

Answer 1

Selling price Less: Variable cost Contribution per unit Fixed cost Break even point $ 4.00 $ -2.25 $ 1.75 $ 38,500.00 22000 =38500/1.75 Target profit Fixed cost Target contribution Required unit to be sold $ 10,500.00 $38,500.00 $49,000.00 28000 =49000/1.75 c&d If sales volume is 24000 units, profit will be 2000 ie excess units over BEP*contribution margin per unit Decrease in income $ 3,500.00 =2000*1.75 $ 7,000.00 =10500-3500 To achieve the target profit, either reduce the variable cost or increase selling price Reduce variable cost Sales $ 96,000.00 =24000*4 Target contribution $49,000.00 Defference is total varibale cost $47,000.00 Revised variable cost per unit $ 1.96 -47000/24000 Price decreased by 2.25-1.96=0.29 per unit Increase selling price Target contribution Total variable cost Target sales Revised selling price per unit $ 49,000.00 $ 47,250.00=21000*2.25 $ 96,250.00 $ 4.01 =96250/24000 Price increase by 4.01-4=0.01 per unit