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,

totalling $30,000.

a. 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.

NOTE: Use simple income statements to support your explanations

Answer 1

Answer a)

Calculation of sales revenue to be generated to break-even

Sales revenue to break even = Total fixed cost/ Contribution margin ratio

                                                      = $ 30,000/ 35.2941%

                                                       = $ 85,000

Therefore sales revenue to break-even is $ 85,000.

Working Note:

Calculation of contribution margin ratio

Contribution margin ratio = Contribution margin per unit/ Selling price per unit

                                                = (Selling price per unit – Variable cost per unit)/ Selling price per unit

                                               = ($ 170 per ticket - $ 110 per ticket)/ $ 170 per ticket

                                                = 35.2941%   

Answer b)

Calculation of number of tickets to be sold to break-even

Number of tickets to be sold to break even = Total fixed cost/ Contribution margin per ticket

                                                                              = $ 30,000/ $ 60 per ticket

                                                                                = 500 tickets

Therefore 500 tickets should be sold to break-even.

Explanation:

Income Statement
Sales (500 tickets X $ 170 per ticket)	$       85,000
Less: Variable cost (500 tickets X $ 110 per ticket)	$       55,000
Contribution margin	$       30,000
Less: Fixed Costs	$       30,000
Net Operating Income	-

Since Net operating income is nil, it implies that 500 units are required to break-even.

Working Note:

Calculation of contribution margin per ticket

Contribution margin per ticket = Selling price per ticket – Variable cost per ticket

                                                         = ($ 170 per ticket - $ 110 per ticket)

                                                         = $ 60 per ticket

Answer 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	$        -3,000	$            -	$       1,500

Answer d)

Calculation of sales revenue to be generated to break-even if variable costs increase by 5%

Sales revenue to break even = Total fixed cost/ Contribution margin ratio

                                                      = $ 30,000/ 32.0588%

                                                       = $ 93,578

Therefore sales revenue to break-even is $ 93,578.

Calculation of number of tickets to be sold to break-even

Number of tickets to be sold to break even = Total fixed cost/ Contribution margin per ticket

                                                                              = $ 30,000/ $ 54.50 per ticket

                                                                                = 550.46 tickets

Therefore 550.46 tickets should be sold to break-even.

Note: Since the break-even point in units is in fraction, the final answer may be rounded off to next higher multiple of "1" , i.e. 551 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

Working Note:

Calculation of revised variable cost per ticket

Revised variable cost per ticket = Existing variable cost per ticket X 105%

                                                           = $ 110 per ticket X 105%

                                                           = $ 115.50 per ticket    

Calculation of contribution margin per ticket

Contribution margin per ticket = Selling price per ticket – Variable cost per ticket

                                                         = ($ 170 per ticket - $ 115.50 per ticket)

                                                         = $ 54.50 per ticket

Calculation of contribution margin ratio

Contribution margin ratio = Contribution margin per unit/ Selling price per unit

                                                = (Selling price per unit – Variable cost per unit)/ Selling price per unit

                                               = ($ 170 per ticket - $ 115.50 per ticket)/ $ 170 per ticket

                                                = 32.0588%