Question

The Deli Ltd prepares meals for sale 24 hours a day.

Fixed cost for the restaurant is $450000 per year. On average the sales check per customer is $8.00. The average cost of food and other variable costs is $3.20 per customer. The income tax rate is 30%. Target net income is $105000.

Required:

1. How much sales (in dollars) are needed to earn the target net income?
2. How many customers are needed to breakeven?
3. How many customers are needed to earn a net income of $105,000?
4. How can an understanding of break-even analysis assist the owners of Deli Ltd?

Answer 1

Pretax profit = $105,000 / 70% = $150,000

Contribution margin = $8 - $3.20 = $4.80

Contribution margin ratio = $4.80 / $8 = 60%

1.

Sales dollars = ($450,000 + $150,000) / 60% = $1,000,000

2.

Breakeven point in customer = $450,000 / $4.80 = 93,750 customers

3.

Customer to earn target profit = ($450,000 + $150,000) / $4.80 = 125,000 customers

4.

Breakeven point is where the total sales will be equal to total of fixed and variable cost. At Breakeven point theres is no profit. Understanding the Breakeven point helps in determining the average price to be charged and the number of unit to be sold or sales volume to be made to recover the total cost.