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Shawarma Inc., is a new company currently studying various alternatives in regard to opening Shawarma outlets.

Shawarma Inc., is a new company currently studying various alternatives in regard to opening Shawarma outlets. The only available data was formulated by a hired consultant who, unfortunately, died quite suddenly. A summary of the information that the consultant developed is as follows:

 

Average Selling Price per Shawarma $7.50

 

Normal Monthly Costs

Fixed

Variable

Cost of Shawarmas Sold

$0

$5,500

Manager’s Salary

2,000

0

Wages

2,000

0

Rent

1,500

500

Utilities

500

200

Insurance and Commissions

1,000

0

Total Costs

$7,000

$6,200

 

*Note: Costs are based on budgeted sales of 2,000 shawarma’s per month.

 

The above information represents estimates for the operations of a Shawarma outlet.  Joe’s is interested in opening the outlets as soon as possible and has asked you to comment on the various   scenarios as reflected in the questions a thru to c below.

 

Required:

 

Calculate the breakeven point for a shawarma outlet in terms of both sales dollars and

number of shawarmas sold each month. (6 marks)

 

The company is considering offering a promotional selling price of $5.00 per shawarma during the first month of operations. How many extra shawarmas will have to be sold by a shawarma outlet at the promotional price compared to the normal average selling price in order to earn operating income of $2,500 during the first month? (6 marks)

 

As an incentive program for the outlet manager, Joe S. Shawarma is considering implementing an alternative compensation method. Instead of paying the manager a fixed salary of $2,000 per month, the company is considering an incentive plan of $1,000 per month plus 8% of monthly revenue Using this alternative method and the normal average selling price per shawarma, calculate how many shawarmas will have to be sold to achieve an operating income of $2,000 per month. (8 marks)

Top Answer

a) Breakeven point: Contribution margin ratio = Contribution/Sales = (15000-6200)/15000 = 0.5867 Contribution per unit = 7.5... View the full answer

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1 comment
  • a) Breakeven point: Contribution margin ratio = Contribution/Sales = (15000-6200)/15000 = 0.5867 Contribution per unit = 7.5 - 6200/2000 = $4.4 BEP in $ = Fixed costs/CM Ratio = 7000/0.5867 = $11,932 BEP in units = Fixed cost/Contribution margin per unit = 7000/4.4 = 1591.91 = 1591 units 258.06 units b) Desired contribution = desired operating income + fixed costs = 2500+7000 = 9500 # units to be sold to realize contribution of $9500 = 9500/(5-3.1) = 5000 units c) Revised contribution = 4.4 - 7.5*0.08 = $3.8 Revised fixed cost = 7000-1000 = 6000 Desired contribution = 2000+6000 = 8000/3.8 = 1578.95 = 1579 units Number of shawarmas to be sold to get $2000 per month = 1579 units.
    • tutorhyvet
    • Dec 01, 2016 at 5:37pm

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