Question

Texas State Concession currently sells hot dogs. During a typical month, the stand reports a profit of $9,000 with sales of $50,000, fixed costs of $21,000, and variable costs of $0.64 per hot dog.

Next year, the company plans to start selling nachos for $3 per unit. Nachos will have a variable cost of $0.72 and new equipment and personnel to produce nachos will increase monthly fixed costs by $8,808. Initial sales of nachos should total 5,000 units. Most of the nacho sales are anticipated to come from current hot dog purchasers, therefore, monthly sales of hot dogs are expected to decline to $20,000. After the first year of nacho sales, the company president believes that hot dog sales will increase to $33,750 a month and nacho sales will increase to 7,500 units a month.

Required:

1. Determine the monthly break-even sales in dollars before adding nachos.

2. Determine the monthly break-even sales during the first year of nachos sales, assuming a

constant sales mix of 1 hotdog and 2 units of nachos.

3. What is the expected monthly operating income for the second year that nachos are sold?

Answer 1

1)Total Contribution = Fixed cost +Profit

                 = 21000 +9000

                 = 30000

Contribution margin ratio =Contribution /sales

                  = 30000/50000

                  =.60

Breakeven point in $ = Fixed cost /contribution margin ratio

                     = 21000 /.60

                      = $ 35000

2)Contribution per unit for nachos = selling price -variable cost

                   = 3 -.72

                    = $ 2.28 per unit

contribution margin ratio =contribution /sales

                           = 2.28 /3

                           = .76 or 76%

Total fixed cost = 21000+8808=29808

	Hot dog	Nachos	Total
contribution margin ratio	60%	76%
weight	1	2	3
Weighted average contribution margin ratio	60*1/3= 20%	76*2/3= 50.66667	70.66667%

Breakeven point =Fixed cost /contribution margin ratio

                 = 29808 / .7066667

                = $ 42181.13 (rounded to 42181)

3)

	Hotdog	Nachos	Total
Total sales	33750	7500*3=22500
Contribution margin ratio	60%	76%
contribution margin	33750*60%= 20250	22500*76%= 17100	37350
less:fixed cost			(29808)
Net operating income for year 2 (on monthly basis)			7542