Question

1. Tom owns a Pizza Restaurant. Expenses for the restaurant include raw material for pizza at $6.43 per slice, $142.00 as monthly rental and $51.00 monthly as insurance. A restaurant sells pizza at a rate of $11.43/slice. How many slices should the restaurant sell in a month to break even?

2. You run a nail salon. Fixed monthly cost is $5,595.00 for rent and utilities, $5,643.00 is spent in salaries and $1,487.00 in insurance. Also every customer requires approximately $2.00 in supplies. You charge $75.00 on average for each service.

You are considering moving the salon to an upscale neighborhood where the rent and utilities will increase to $11,373.00, salaries to $6,720.00 and insurance to $2,269.00 per month. Cost of supplies will increase to $6.00 per service. However you can now charge $160.00 per service. At what point will you be indifferent between your current location and the new loaction?

Answer 1

1. Raw material for pizza = $ 6.43 per slice

selling price of pizza= $ 11.43 per slice

Monthly fixed expense = Rent + Insurance

= 142 + 51

= $ 193

Contribution margin per share = selling price per slice - variable cost per slice

= 11.43 - 6.43

= $ 5

Number of slice to be sold to break even = Fixed cost/Contribution margin per slice

= 193/5

= 39 [rounded to whole number ]

Hence, 39 slices must be sold for break even.

2. FOR CURRENT LOCATION

Rent expense = $ 5,595

Salaries = $ 5,643

Insurance = $ 1,478

Total fixed costs = Rent + Salaries + Insurance

= 5,595 + 5,643 + 1,487

= $ 12,725

Variable cost per service = $ 2

Selling price per service = $ 75

FOR NEW LOCATION

Rent = $ 11,373

Salaries= $ 6,720

Insurance = $ 2,269

Total fixed cost= Rent + Salaries + Insurance

= 11,373 + 6,720 + 2,269

= $ 20,362

Variable cost per service = $ 6

Selling price per service = $ 160

Let the indifferent level of service be z

PROFIT UNDER CURRENT LOCATION = PROFIT UNDER NEW LOCATION

75z-2z-12,725 = 160z-6z-20,362

73z-12,725 = 154z-20,362

154z-73z = 20,362-12,725

81z = 7,637

z = 94 [rounded to nearest whole number ]

Hence, indifference point will be 94 services

NOTE ;- Exact answers they slightly differ due to rounding off.