Question

Juice It Up is a healthy smoothie bar operating in conjunction with a local gym. The average price of a smoothie is $5.75; the average cost of ingredients is $2.00 per smoothie and it costs $0.50 per smoothie to run the equipment. The bar is open every evening with staff consisting of a smoothie-maker and one or two servers. The fixed costs (salaries, rent, utilities, etc.) total $250,000 per year.

a) The owner wants to know how many smoothies the bar must sell during the year to start making a profit. What is the revenue at the breakeven quantity found?

b) If Juice It Up sold 90,000 smoothies a year, would it make a profit? Explain

c) The owner thinks that an annual profit of $50,000 is reasonable. How many smoothies should the bar sell to make $50,000 profit?

d) An available option is to keep the bar open later on weekends. The attraction would be a discount of $1.00 off the regular smoothie price. The extra salaries of servers and smoothie-maker for the whole year are estimated to be $30,000. How many extra smoothies must the bar sell in order to break even in this option?

Need answers for a,b,c,d

Answer 1

Given,

Selling price of smoothie= $5.75

Variable cost of smoothie =$2+ $0.5= $2.5

Fixed costs per year = $250,000

A) Breakeven point in units =

Fixed Costs ÷ (Sales price per unit – Variable costs per unit)

= 250,000 / (5.75-2.5)

=250,000/3.25

=76923.07 units

Thus, 76923 units of the smoothie must be sold to reach BEP, or to start making a profit. The revenue at BEP is 0, as the BEP is no profit, no loss situation. It will start generating revenue after selling 76,923 units of smoothie

B) Yes, Juice up will earn profit if it sells 90,000 units. The BEP is 76,923 units. Thus, all the units after 76,923 will generate profit.

Profit per unit = Selling price -cost price

Profit = 5.75-2.5 = $3.25

Thus profitable units will be = 90,000-76923 units = 13,077 units

Thus, profit after selling 90,000 units = 13077×3.25 = $42,500.25

(C) Required profit = $50,000

Let the number of units be x

Then, 76,923 units for breakeven

For profit of 50,000 $, if per unit profit is $3.25, then no of units to be sold = 50,000/3.25 = 15,384 units

Therefore total units to be sold for $50,000 profit = 76,923+15384 = 92,307 units

(D)

Selling price of smoothie= 5.75-1.00 = $4.75

Variable cost = $2.50

Fixed costs = 250,000+30,000 = $280,000

Thus, BEP in this case

=Fixed Costs ÷ (Sales price per unit – Variable costs per unit)

=280,000÷(4.75-2.5)

=280,000/2.25

=124,444.44 units

Thus, in this case 124,445 units will be needed to sell to achieve BEP.