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    Break Even, Cash Flow, and After Tax Net Income

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    Problem 16-3

    Mike Solid started a pizzeria in 1999. For this purpose he rented a building for $1,800 per month. Two persons were hired to work full time at the restaurant and six college students were hired at work 30 hours per week delivering pizza. An outside accountant was hired for tax and bookkeeping purposes at a cost of $900 per month. The necessary restaurant equipment and delivery cars were purchased with cash. Mr. Solid has noticed that expenses for utilities and supplies have been rather constant.
    Mr. Solid increased his business between 1999 and 2001. Profits have more than doubled since 1999. Mr. Solid does not understand why his profits have increased faster than his volume.
    A projected income statement for 2002 has been prepared by the accountant and is shown below:

    Projected Income Statement
    For the year ended December 31, 2002

    Sales $308,000
    Cost of food sold $92,400
    Wages & fringe benefits of restaurant help 26,650
    Wages and fringe benefits of delivery persons 54,100
    Rent 15,500
    Accounting services 10,900
    Depreciation of delivery equipment 16,000
    Depreciation of restaurant equipment 8,000
    Utilities 7,165
    Supplies (soap, floor wax, etc) 10,645 241,360
    Income before taxes 66,640
    Income taxes 19,992
    Net income $46,648

    Note: The average pizza sells for $8.50. Assume Mr. Solid pays out 30 percent of his income in income taxes.


    a. What is the break even point in number of pizzas that must be sold?
    b. What is the cash flow break even point in number of pizzas that must be sold?
    c. If Mr. Solid withdraws $14,400 for personal use, how much cash will be left from the 2002 income producing activities?
    d. Mr. Solid would like an after tax net income of $60,000. What volume must be reached in number of pizzas in order to obtain the desired income?
    e. Briefly explain to Mr. Solid why his profits have increased at a faster rate than his sales.
    f. Briefly explain to Mr. Solid why his cash flow for 2002 will exceed his profits.

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    Solution Summary

    Break even, cash flows and after tax net income is examined.