Question

The

Rapid MealRapid Meal

has two restaurants that are open 24 hours a day. Fixed costs for the two restaurants together total

$ 459 comma 000$459,000

per year. Service varies from a cup of coffee to full meals. The average sales check per customer is

$ 8.50$8.50.

The average cost of food and other variable costs for each customer is

$ 3.40$3.40.

The income tax rate is

3030​%.

Target net income is

$ 107 comma 100$107,100.

Requirements

1. Compute the revenues needed to earn the target net income.

2. How many customers are needed to break​ even? To earn net income of

$ 107 comma 100$107,100​?

3. Compute net income if the number of customers is

130 comma 000130,000.

Answer 1

1.

Unit contribution margin = unit sales price – unit variable cost = $ 8.50 - $ 3.40 = $ 5.10

Contribution margin ratio = Unit contribution margin/sales per unit = $ 5.10 /$ 8.50 = 0.6 or 60 %

Target income = required income x tax rate = required income x (1 – 0.3)

Required income = Target income/0.7 = $ 107,100/0.7 = $ 153,000

                                                                        

Dollar sales required to earn target profit = Fixed cost + required net income/ Contribution margin ratio

                                                                  = ($ 459,000 + $ 153,000)/0.6

                                                                   = $ 612,000/0.6 = $ 1,020,000

2.

a)Break-even sales = Fixed cost / Unit contribution margin = $ 459,000/$ 5.10 = 90,000 customers

b)

Sales needed to earn income of 107,000 = (Fixed cost + required income)/ Unit contribution margin

                                                               = ($ 459,000 + $ 153,000)/ $ 5.10

                                                               = $ 612,000/ $ 5.10 = 120,000 customers

3.

Sales revenue(130,000 x $ 8.5)	$    1,105,000
Less: Variable cost(130,000 x 3.4)	$        442,000
Contribution margin	$        663,000
Less: Fixed cost	$        459,000
Gross income	$        204,000
Less: Tax @ 30 %	$          61,200
Net Income	$        142,800