Question

The Eastman Family Restaurant is open 24 hours per day. Fixed costs are $24,000 per month. Variable costs are estimatd at $9.60 per meal. The average revenue is $12 per meal. The restaurant wished to earn a profit before taxes of $6000 per month.

Required:

A) Compute the number of meals that must be served to earn a profit before taxes of $6,000 per month.

B) Assume that fixed costs increase to $30,000 per month. How many additional meals must be served to earn a profit before taxes of $6,000 per month.

Answer 1

A)

Contribution margin per meal

= Selling price per meal – Variable cost per meal

= $12 - $9.60

= $2.40 per meal

Number of meals required to be sold to earn a target profit

= (Fixed costs + Target profit) / Contribution margin per meal

= ($24,000 + $6,000) / $2.40

= 12,500 meals

B)

New number of meals required to earn a target profit

= (New Fixed cost + Target profit) / Contribution margin per meal

= ($30,000 + $6,000) / $2.40

= 15,000

So, additional meals to be served

= New – Old

= 15,000 – 12,500

= 2,500 meals