Break Even Problems In Tutorial Library

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TITLE: Break Even Problems

CLASS / COURSE: Financial Management


1.       As a prospective owner of a club known as Red Rose, you are interested in determining the volume of sales dollars necessary for the coming year to reach the break-even point.  You have decided to break down the sales of the club into four categories, the first category being beer.  Your estimate of the beer sales is that 30,000 drinks will be served.  The selling price for each unit will average 1.50; the cost is $.75.  The second major category is meals, which you expect to be 10,000 units with an average price of $10.00 and a cost of $5.00.  The third major category is desserts and wine, of which you also expect to sell 10,000 units, but with an average price of $2.50 per unit sold and a cost of $1.00 per unit.  The final category is lunches and inexpensive sandwiches, which you expect to total 20,000 units at an average price of $6.25 with a food cost of $3.25.  Your fixed cost (that is, rent, utilities, and so on) is $1,800 per month plus $2,000 per month for entertainment.

A.      What is your break even point in dollars per month?

B.     What is the expected number of meals each day if  you are open 30 days a month?


2.        Using the data in problem 1, make the problem more realistic by adding labor cost  (as a variable cost) at one-third the total cost of meals and sandwichs.  Also add variable expenses (kitchen supplies, tablecloths, napkins, etc.) at 10% of the food cost (both food and drink) for each category.

A.      What is your break even point?

B.     If you expect to make an annual profit of $35,000 (before taxes) for your 12 hours days, what must your total sales be?

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