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In: Accounting

A neighborhood restaurant opens for lunch only and has a menu limited to five meals. The...

A neighborhood restaurant opens for lunch only and has a menu limited to five meals. The history of each menu item relative to its percentage of total sales, selling price (SP), and variable costs (VC) are shown in the following table: Menu Item SP VC SR% Food 1 $15.00 $7.75 16% Food 2 12.95 7.50 20 Food 3 11.00 5.50 22 Food 4 8.95 2.85 14 Food 5 9.95 6.50 8 Total variable cost of beverages averages 55 percent. The restaurant has fixed costs of $546,000 a year and wants an operating income (before tax) of at least $25,000 per year. What level of sales revenue will give the desired operating income be- fore tax?

Solutions

Expert Solution

Food

Sales price

Variable cost

% of sales

1

$15

7.75

16%

2

12.95

7.5

20

3

11

5.5

22

4

8.95

2.85

14

5

9.95

6.50

8

               

Sales revenue for desired profit

=( Fixed cost + desired profit )/(Weighted average SP-weighted average variable cost)

Weighted average SP = $15*16%+12.95*20%+11*22%+8.95*14%+9.95*8%

          = $2.4+2.59+2.42+1.253+0.796 = $9.459

Average cost of beverages = $9.459*55% = $5.202

Weighted average variable cost = $7.75*16%+7.5*20%+5.5*22%+2.85*14%+6.50*8%

          = $1.24+1.48+1.21+0.399+0.52=$0.919

Sales revenue for desired profit = ($546,000+25,000) / ($9.459-(0.919+5.202))

= $571,000/3.338= $171,060

Can be done by not considering cost of beverages based on assumptions.

I hope this will help you .

ekkarill92 answered 1 year ago
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