Question

ABC Catering is putting on a charity dinner. The average selling price for a ticket is $170. The variable cost for the dinner is $110. ABC will also incur fixed costs such as room rental fees and other fixed costs, totaling $30,000.

1. How much sales revenue must ABC Catering generate in order to break even?

b. How many tickets must ABC Catering attract in order to break even? Explain your answer.

c. What is ABC Catering’s profit or loss at each of the following possible ticket sales levels: 450 tickets? 500 tickets? 525 tickets?

d. If variable costs increase by 5 % per dinner guest, what is the new breakeven point in terms of sales revenue and tickets? Compare it to your answers to questions a and b, and explain the difference.

Answer 1

a. Sales revenue to break even

= [Total fixed cost/ Contribution margin] * Selling price

= [30,000/ (170-110)] * 170

= $85,000

b. Number of tickets to be sold to break even

= Total fixed cost/ Contribution margin per ticket

= [30,000/ (170-110)]

= 500 tickets

c. Income Statement

	450 Tickets	500 Tickets	525 Tickets
Sales (at $ 170 per ticket)	$       76,500	$ 85,000	$     89,250
Less: Variable cost (at $ 110 per ticket)	$       49,500	$ 55,000	$     57,750
Contribution margin	$       27,000	$ 30,000	$     31,500
Less: Fixed Costs	$       30,000	$ 30,000	$     30,000
Net Operating Income (loss)	$ (3,000)	$    -	$       1,500

d. New variable cost = 110 + 5% = 115.5

Sales revenue to break even

= [Total fixed cost/ Contribution margin] * Selling price

= [30,000/ (170-115.5)] * 170

= $93,578

Number of tickets to be sold to break even

= Total fixed cost/ Contribution margin per ticket

= [30,000/ (170-115.5)]

= 550 tickets

Explanation: Since the variable cost per unit has increased from $ 110 per ticket to $ 115.50 per ticket, the contribution margin per ticket will reduce from $ 60 per ticket to $ 54.50 per ticket. The contribution margin per unit is towards recovery of fixed expenses. Once all fixed expenses are recovered, the break-even point is reached.

Since with increase in variable cost per ticket, the contribution per ticket towards fixed expense has decreased, the break-even point has increased from $ 85,000 to $ 93,578