Question

Rosie runs her own hot dog stand on the U of A campus. The monthly cost of the cart rental and business permit is $300. Rosie's contribution margin is $2.00 per hot dog sold. She has recently added individual servings of potatos chips to her product offering. Each bag of potato chips has a contribution margin of $0.60 per bag. Rosie sells 5 bags of potato chips for every 5 hot dogs. 1. What is Rosie's weighted-average contribution margin per unit? 2. How many total units much Rosie sell in a month to earn a target monthly profit of $1,000? 3. Of the total units needed to earn $1,000 of profit, how many are hot dogs and how many are bags of potato chips? Contribution margin Breakeven Fixed expenses + Operating income per unit units ( $ 300 + $ 1,000 / $ 1.30 1,000 3. Of the total units needed to earn $1,000 of profit, how many are hot dogs and how many are bags of potato chips? First identify the formula, then compute the breakeven unit per item. = Breakeven unit per item Hot dog Potato chips

Answer 1

1. Weighted average contribution margin per unit = (Hot dog contribution margin per unit * Sales mix) + (Potato chips contribution margin per unit * Sales mix)

= ($2 * 1/2) + ($0.6 * 1/2)

= $1.3

2. Total units = (Fixed cost + Target profit) / Weighted average contribution margin per unit

= ($300 + $1,000) / $1.3

= 1,000

3.

		Break-even unit per item
Hot dog	1,000*(1/2)	500
Potato chips	1,000*(1/2)	500
		1,000