Chapter 20: Q24RQ (page 1120)
What is a company’s cost structure? How can cost structure affect a company’s profits?
The proportion of fixed costs to variable costs is known as the company’s cost structure.
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Question: Of the three approaches to calculate sales required to achieve the breakeven point, which one(s) calculate the required sales in units and which one(s) calculate the required sales in dollars?
Question: Steve and Linda Hom live in Bartlesville, Oklahoma. Two years ago, they visited Thailand. Linda, a professional chef, was impressed with the cooking methods and the spices used in Thai food. Bartlesville does not have a Thai restaurant, and the Homs are contemplating opening one. Linda would supervise the cooking, and Steve would leave his current job to be the maître d’. The restaurant would serve dinner Tuesday through Saturday. Steve has noticed a restaurant for lease. The restaurant has seven tables, each of which can seat four. Tables can be moved together for a large party. Linda is planning on using each table twice each evening, and the restaurant will be open 50 weeks per year. The Homs have drawn up the following estimates:
Average revenue, including beverages and desserts \( 45 per meal Average cost of food 15 per meal Chef’s and dishwasher’s salaries 5,100 per month Rent (premises, equipment) 4,000 per month Cleaning (linen, premises) 800 per month Replacement of dishes, cutlery, glasses 300 per month Utilities, advertising, telephone 2,300 per month
Requirements
1. Compute the annual breakeven number of meals and sales revenue for the restaurant.
2. Compute the number of meals and the amount of sales revenue needed to earn operating income of \)75,600 for the year.
3. How many meals must the Homs serve each night to earn their target profit of $75,600?
4. What factors should the Homs consider before they make their decision as to whether to open the restaurant?
What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?
The contribution margin income statement of Sugar Lips Donuts for August 2018 follows:
Sugar Lips sells three dozen plain donuts for every dozen custard-filled donuts. A dozen plain donuts sells for \(4.00, with total variable cost of \)1.80 per dozen. A dozen custard-filled donuts sells for \(8.00, with total variable cost of \)3.60 per dozen.
Requirements
1. Calculate the weighted-average contribution margin.
2. Determine Sugar Lips’s monthly breakeven point in dozens of plain donuts and custard-filled donuts. Prove your answer by preparing a summary contribution margin income statement at the breakeven level of sales. Show only two categories of costs: variable and fixed.
3. Compute Sugar Lips’s margin of safety in dollars for August 2018.
4. Compute the degree of operating leverage for Sugar Lips Donuts. Estimate the new operating income if total sales increase by 30%. (Round the degree of operating leverage to four decimal places and the final answer to the nearest dollar. Assume the sales mix remains unchanged.)
5. Prove your answer to Requirement 4 by preparing a contribution margin income statement with a 30% increase in total sales. (The sales mix remains unchanged.)
Owner Shan Mu is considering franchising her Noodles by Murestaurant concept. She believes people will pay \(10.00 for a large bowl ofnoodles. Variable costs are \)5.00 per bowl. Mu estimates monthly fixed costsfor a franchise at \(9,000.
Requirements
1. Use the contribution margin ratio approach to find a franchise’s breakevensales in dollars.
2. Mu believes most locations could generate \)61,500 in monthly sales. Isfranchising a good idea for Mu if franchisees want a minimum monthlyoperating income of $21,000? Explain your answer.
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