Question

Rio Coffee Shoppe sells two coffee drinks—a regular coffee and a latte. The two drinks have the following prices and cost characteristics:

	Regular Coffee			Latte
Sales price (per cup)	$	1.60		$	2.90
Variable costs (per cup)		0.80			1.70

The monthly fixed costs at Rio are $5,984. Based on experience, the manager at Rio knows that the store sells 80 percent regular coffee and 20 percent lattes.

Required:

How many cups of regular coffee and lattes must Rio sell every month to break even?

	Break-even Sales in Units Regular coffee Lattes

Answer 1

Answer:

For Regular Coffee:

Contribution Margin per Cup = Sales Price per cup – Variable costs per cup
Contribution Margin per cup = $1.60 - $0.80
Contribution margin per cup = $0.80

Fixed Cost = Total Fixed Cost * 80%
Fixed Cost = $5,984 *80%
Fixed Cost = $4,787.2

Break Even Sales in Units = Fixed Cost / Contribution margin per cup
Break Even Sales in Units = $4,787.2 / $0.80
Break Even Sales in Units = 5,984 units

For Lattes:

Contribution Margin per Cup = Sales Price per cup – Variable costs per cup
Contribution Margin per cup = $2.90 - $1.70
Contribution margin per cup = $1.20

Fixed Cost = Total Fixed Cost * 20%
Fixed Cost = $5,984 *20%
Fixed Cost = $1,196.8

Break Even Sales in Units = Fixed Cost / Contribution margin per cup
Break Even Sales in Units = $1,196.8 / $1.20
Break Even Sales in Units = 997 units