Question

Tony Manero owns a small company that refinishes and maintains the wood flooring of many dance clubs in Brooklyn. Because of heavy use, his services are required at least quarterly by most of the clubs. Tony’s annual fixed costs consist of depreciation expense for his van, polishing equipment, and other tools. These expenses were $9,000 this year. His variable costs include wood-staining products, wax, and other miscellaneous supplies. Tony has been in this business since 1977 and accurately estimates his variable costs at $1.50 per square yard of dance floor. Tony charges a rate of $15 per square yard.

a. How many square yards of dance floor will he need to work on this year to cover all of his expenses but leave him with zero operating income?

b. What is this number called?

c. Calculate the breakeven point in dollar sales.

d. Tony has little competent competition in the Brooklyn area. What happens to the breakeven point in sales dollars if Tony increases his rate to $18 per square yard?

e. At the $18 per square yard rate, what are Tony’s operating income and net income if he completes work on 14,000 square yards this year? Assume his tax rate is 40 percent and he has a $25,000 loan outstanding on which he pays 12 percent interest annually.

Answer 1

a. How many square yards of dance floor will he need to work on this year to cover all of his expenses but leave him with zero operating income?

		$
Selling Price/square yard	Given	15.00
Variable Cost/square yard	Given	1.50
Contribution /square yard	Selling Price-Variable Cost	13.50
Fixed Cost	Given	9000
Break Even point in square yards	Fixed cost/contribution per unit	666.7

Answer: Tony needs to work on 666.67 square yards of dance floor this year to cover all of his expenses but leave him with zero operating income

b. What is this number called?

This number is called the break-even point.

c. Calculate the breakeven point in dollar sales.

Breakeven point in dollar sales = Break-even point in units * selling price per unit

= 666.67*15 = $10,000

d. Tony has little competent competition in the Brooklyn area. What happens to the breakeven point in sales dollars if Tony increases his rate to $18 per square yard?

Again, breakeven point in dollar sales = Break-even point in units * selling price per unit

= 666.67*18 = $9818.18

Thus, breakeven point in dollar sales reduces upon increase in selling price to $18 per square yard.

e. At the $18 per square yard rate, what are Tony’s operating income and net income if he completes work on 14,000 square yards this year? Assume his tax rate is 40 percent and he has a $25,000 loan outstanding on which he pays 12 percent interest annually.

Operating income is $ 222,000 and Net income is $ 131,400. Workings follow:

		Rate/square yard	Yards completed	Amount
	Selling Price/square yard	18	14000	252000.00
less:	Variable Cost	1.5	14000	21000.00
	Contribution (Selling Price-Variable Cost)	16.50	14000	231000.00
less:	Fixed cost	NA	NA	9000
	Operating income			222000.00
less:	Interest	25000*0.12		3000
	Earning Before taxes			219000.00
less:	Tax	EBT*0.4		87600
	Earning after taxes			131400.00