Question

The Express Meal has two restaraunts that are open 24 hours a day. Fixed costs for the two restaraunts together are $400,000 per year. The average sales check per customer is $8.50. The average cost of food and other variable costs for each customer is $3.50. The income tax rate is 30%. Target net income is $140,000.

Requirements:

a) compute the revenues needed to earn the target net income.

b) how many customers are needed to break even? to earn net income of $140,000?

c) Compute net income if the number of customers is 150,000.

Answer 1

a) Target net income Tax rate Target before-tax income Add: Fixed costs per year Target contribution margin Contribution margin per unit Target sales units required Selling price per unit Target sales dollars required $140,000 30% $200,000 ($140000 / (1-30%) = $140000 / 70% = $140000 / 0.7 = $200000] $400,000 $600,000 ($200000+ $400000] $5 ($8.50 - $3.50 = $5.00 --> Selling price per unit - Variable cost per unit] 120,000 ($600000 / $5 = 120000 customers --> Target contribution margin / Contribution margin per unit) $8.50 $1,020,000 [120000 units x $8.50] b) Target number of customers to breakeven = Fixed costs per year / Contribution margin per unit Fixed costs per year Contribution margin per unit Target customers to breakeven $400,000 $5 [As calculated in Part-(a)] 80,000 [$400000 / $5 = 80000 units --> Fixed costs per year / Contribution margin per unit] Customers to target net income 120,000 [As calculated in Part-(a)]

c) Number of customers served Contribution margin per unit Contribution margin Less: Fixed costs per year Income before taxes Less: Income taxes Net income 150,000 $5 [As calculated in Part-(a)] $750,000 (150000 units x $5] -$400,000 $350,000 $105,000 [$350000 x 30% --> Income before taxes x Tax rate] $245,000