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    CVP Questions on Break Even Sales and Units

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    1. The rapid meal has two restaurants that are open 24 hours. Fixed costs for the two restaurants together total $450,000 per year. Service varies from a cup of coffee to full meals. The average sales check per customer is $8.00. The average cost of food and other variable costs for each customer is $3.20. The income tax rate is 30%. Target net income is $105,000.

    1. Compute the revenues needed to earn the target net income.

    2. How many customers are needed to break even? To earn net income of $105,000?

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

    2. Color Rugs is holding a two-week carpet sale at Jerry's club, a local warehouse store. Color Rugs plans to sell carpets for $500 each. The company will purchase the carpets from a local distributor for $350 each, with the privilege of returning any unsold units for a full refund. Jerry's club has offered Color Rugs two payment alternatives for the use of space.
    Option 1: A fixed payment of $5,000 for the sale period
    Option 2: 10% of total revenue earned during the sale period
    Assume color rugs will incur no other costs.

    1. Calculate the breakeven point in units for (a) option 1 and (b) option 2

    2. At what level of revenues will Color Rugs earn the same operating income under either option?
    a. For what range of unit sales will color rugs prefer option 1?
    b. For what range of unit sales will Color rugs prefer option 2?

    3. Calculate the degree of operative leverage at sales of 100 units for the two rental options.

    4. Briefly explain and interpret your answer to requirement 4.

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    Solution Summary

    The solution explains some questions relating to breakeven analysis and operating leverage