A friend of yours has approached you about starting a hot dog stand at the courthouse....

A friend of yours has approached you about starting a hot dog stand at the courthouse. She has collected the following information and would like you to help her evaluate the business. The sale price will be 3.50 for a hot dog, potato chips and a drink. The projected cost per sale is 1.35. Condiments are projected to be $ .35 per sale. The hot dog cart will be leased for a 12-month period for $ 425 per month. Liability insurance will be $ 1,200 per year. The owner wants to earn $ 20,000 per year and assumes a tax rate of 20%. An annual profit is projected to be $10,000.

Complete the Break-Even analysis and answer the following questions.

1. What are the total expenses per the income statement?

2. How many units must be sold per year?

3. If the sales price changes to $ 4.00 and the owner salary changes to $ 15,000, how many units must be sold?

Expert Solution

Variable Cost=(1.35+.35)	1.7
Contribution Per unit (3.50-1.70)	1.8
Fixed Cost =(425*12 +1200+20000)	26300
Break Even Units =Fixed Cost/Contribution =26300/1.8	14,611	Units
Break Even Dollar =14611*3.50	$51,139
Before Tax Profit =10000*100/80	$12,500
How Many Units to sold to get a profit $10000 =(26300+12500)/1.8	21,556	Units

1. What are the total expenses per the income statement?

Income Statement
Sales 21566*3.50		75,444
Variable cost	36,644.44
Fixed Cost	26,300.00
Total Cost Before Tax Expense		62,944
Profit Before Tax		12500
Less Tax 20%		2500
Net Income		10000

2. How many units must be sold per year?

21566 units

So total Expense =62944+2500=$65444.44

If the sales price changes to $ 4.00 and the owner salary changes to $ 15,000, how many units must be sold?

Variable Cost=(1.35+.35)	1.7
Contribution Per unit (4-1.70)	2.3
Fixed Cost =(425*12 +1200+15000)	21300
Before Tax Profit =10000*100/80	$12,500
How Many Units to sold to get a profit $10000 =(21300+12500)/1.8	14,696

Answer is 14696 units

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