Question

Tony’s Hot Dog Stand

1. 1,600 people per day pass stand; 1 of 4 buy

2. ¼ buy=conversion rate=25%

3. Cogs=$.25

4. Avg. customer buys 2 tube steaks @$1 each

5. Cost of tube steaks - $.25 each

6. Customer buys 1x/day

7.   Fixed Costs - $36K Tony salary; $12K depreciation ((he bought the stand for $60,000/5=12,000) So the total fixed cost is $48,000)

8. Business Days – 250 per year

9. Sales (Revenue) is $200,000

10. Variable Cost is $50,000

11. Fix Cost is $48,000

Now we need to calculate Tony’s Break-Even....For Tony, this is a number he wants to know every day. Calculating the Break-Even for the Hot Dog Stand BE =   FC/GM%

Yearly Break Even = ________                    FC = _______ GM% = _______%

Monthly Break-Even = ___________           FC = _______ GM% =________%

Daily Break Even = _____________            FC = _______ GM % =_______ %

How did you calculate the breakeven?

What does this actually mean? Tony has to sell ___ hot dogs per day just to stay in business, anything after that is profit!

What is Tony’s Net Profit (year) (This is the stuff you want)?

Answer 1

Part A)

The value of GM% is calculated as under:

GM% Yearly = (Total Sales Value - Total Variable Cost)/Total Sales Value = (200,000 - 50,000)/200,000 = 75%

GM% Monthly = will remain same at 75% assuming equal volume of sales per month.

GM% Daily = (Total Daily Sales Value - Total Daily Variable Cost)/Total Daily Sales Value = (1,600*25%*2*1 - 1,600*25%*2*.25)/1,600*25%*2*1 = 75%

Based on the above calculations, we can conclude that GM% will remain constant at 75% for all the three Break Even Calculations. Now, we can derive the value of Break Even Sales as below:

Yearly Break Even = Fixed Cost/GM% = 48,000/75% = $64,000

Monthly Break Even = Fixed Cost/GM% = (48,000/12)/75% = $5,333.33

Daily Break Even = (48,000/250)/75% = $256

______

The above calculations show that Tony will have to make a sales of $256 (256*$1) per day in order to cover its fixed cost. At this level of sales, Tony will make no profit or loss.

Tony has to sell 256 hot dogs per day just to stay in business, anything after that is profit.

______

Part B)

The value of Tony's Net Profit (Year) is calculated as follows:

Net Profit (Year) = Total Sales - Total Variable Cost - Total Fixed Cost = 200,000 - 50,000 - 48,000 = $102,000