Question

You open a new business.   It’s a “simple” take-out “hamburger joint”.  

Your menu is very basic –

You offer 1 “menu item” – a 1/4 lb hamburger with french fries and a beverage.

You calculate that your “fixed costs” are $1500 a month or $18,000 annually($1500 * 12 months). (Fixed costs are costs incurred no matter how many items you sell. These costs include such things as building rent, bank loan, insurance, etc.)

• Your figure that your variable costs (expenses that vary according to how many items you sell – food costs, some labor costs, etc.) amount to $4.00per menu item sold.

• The price that you charge for 1 menu item order (hamburger, fries, & drink) is $7.00.

• You “forecast” that you can sell a total of 20,000 orders for the year.

Question 1 – How many orders must you sell in a year to “break-even” for the year?

Question 2 – How many orders must you sell to realize a profit of $24,000 for the year?

Question 3 – If your revenue forecast for the year is correct, what will your profit be?

Answer 1

1: Break even point = Fixed costs/(Selling price-Variable cost)per unit

= 18000/ (7-4)= 6000 units

2: Orders to sell = (Fixed costs+Profit) /(Selling price-Variable cost)per unit

= (18000+24000)/ (7-4)= 14000 units

3: At 20000 units, profit = Revenue=Variable cost - fixed cost

= 20000*(7-4)-18000

= 42000