Question

You just won your state lottery and will be receiving a check for $1 million. You have always wanted to start your own food truck business A new food truck with kitchen and other related equipment costs about $100,000. Other fixed costs including salaries, gas for the truck, licensing fees are estimated to be about $50,000 per year. You decided to offer traditional Mediterranean cuisine. Variable costs include food and beverages estimated at $6 per platter (meat, rice, vegetable and pita bread). Meals will be priced at $10.

1. What is the sunk cost?
2. What’s the relevant cost?
3. What’s the breakeven point for this business?

Answer 1

1)A sunk cost refers to a cost that has already occurred and has no potential for recovery in the future.

Here, sunk cost is the new food truck with kitchen and other related equipment costs about $100,000.

2)

‘Relevant costs’ can be defined as any cost relevant to a decision. A matter is relevant if there is a change in cash flow that is caused by the decision.

The change in cash flow can be:

• additional amounts that must be paid
• a decrease in amounts that must be paid
• additional revenue that will be earned
• a decrease in revenue that will be earned.

So , relevant cost in relation to this business is variable costs include food and beverages estimated at $6 per platter (meat, rice, vegetable and pita bread).

3)Calculation of the  breakeven point for this business:

Contribution margin = sales price - variable costs =$10-$6=$4.

Break-even point = fixed costs ÷ contribution margin=$150,000/$4=37,500 units