# Target sales variable costs fixed costs target after

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previous value of \$8) so variable costs per unit will be \$10 + \$4 = \$14. Target sales -Variable costs - Fixed costs = (target after-tax net income) / (1 - tax rate) (\$15 x N) - (\$14 x N) - \$714,000 = \$90,000 / (1 - 0.4) (\$15 x N) - (\$14 x N) - \$714,000 = \$150,000 \$1 x N = \$864,000 N = 864,000 units \$15 x N = \$12,960,000 4. Let P = new selling price Current contribution ratio is \$3 / \$15 = 0.20 New contribution ratio is (P - \$14) / P = 0.20 0.20P = P - \$14 0.80P = \$14 P = \$14 / 0.80 P = \$17.5
11 | P a g e 70. 1. Daily break-even volume is 85 dinners and 170 lunches: First compute contribution margins on lunches and dinners: Variable cost percentage = (\$1,246,500 + \$222,380) / \$2,098,400 = 70% Contribution margin percentage = 1 - variable cost percentage = 1 - 70% = 30% Lunch contribution margin = 0.30 x \$20 = \$6 Dinner contribution margin = 0.30 x \$40 = \$12 Annual fixed cost is \$170,940 + \$451,500 = \$622,440 Let X - number of dinners and 2X = number of lunches (\$12 x X) + (\$6 x 2X) - \$622,440 = 0 \$24(X) = \$622,440 X = 25,935 dinners annually to break even 2X = 51,870 lunches annually to break even On a daily basis: Dinners to break even = 25,935 / 305 = 85 dinners daily Lunches to break even = 85 x 2 = 170 lunches daily or 51,870 / 305 = 170 lunches daily. To determine the actual volume, let Y be a combination of 1 dinner and 2 lunches. The price of Y is \$40 + (2 x \$20) = \$80, and total volume in units of Y is \$2,098,400 / \$80 = 26,230 and daily volume is 26,230 / 305 = 86. Therefore, 86 dinners and 2 x 86 = 172 lunches were served on an average day. This is 1 dinner and 2 lunches above the break-even volume. 2. The extra annual contribution margin from the 3 dinners and 6 lunches is: 3 x \$40 x 0.30 x 305 = \$10,980 + 6 x \$20 x 0.30 x 305 = 10,980 Total \$21,960 The added contribution margin is greater than the \$15,000 advertising expenditure. Therefore, the advertising expenditure would be warranted. It would increase operating income by \$21,960 - \$15,000 = \$6,960.
12 | P a g e 3. Let Y again be a combination of 1 dinner and 2 lunches, priced at \$80. Variable costs are .70 x \$80 = \$56, of which \$56 x 0.25 = \$14 is food cost. Cutting food costs by 20% reduces variable costs by 0.20 x \$14 = \$2.80, making the variable cost of Y \$56 - \$2.80 = \$53.20 and the contribution margin \$80 - \$53.20 = \$26.80. (This could also be determined by adding the \$2.80 saving in food cost directly to the old contribution margin of \$24.) The required annual volume in Y needed to keep operating income at \$7,080 is: \$26.80 (Y) - \$622,440 = \$7,080 \$26.80 (Y) = \$629,520 Y = 23,490 Therefore, daily volume = 23,490 / 305 = 77 If volume drops no more than 86 - 77 = 9 dinners and 172 - 154 = 18 lunches, using the less costly food is more profitable. However, there are many subjective factors to be considered. Volume may not fall in the short run, but the decline in quality may eventually affect repeat business and cause a long-run decline. Much may depend on the skill of the chef. If the quality difference is not readily noticeable, so that volume falls less than, say, 10%, saving money on the purchases of food may be desirable. CASE STUDIES 1. Tesco: a. Yes, breakeven is a good performance monitor over the longer term because it provides important benchmark for long term planning. b. If the Tesco US operations took longer to breakeven than expected, the company would not divest because it depends on the working model of company and since Tesco’s major business is the retail, divestment can be done only to non-core business.

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