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# Calculating sales, profits, revenues, and costs

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Joe Bell recently opened Joe's Pub in the University District. Because of licensing restrictions the only liquor he can sell is beer. The average price of beer at Joes pub is \$3.00 per glass and each glass on average costs Joe \$2.20. Joe has hired a bartender and waiter at \$3,000 and \$2,000 per month respectively. His rent utilities and other fixed operating costs are \$5,000 per month. Joe is considering selling hamburgers for 1.25 each to attract customers. Joe would buy buns for \$1.20 a dozen and ground beef for \$2.80 per pound. Each pound of beef will make 7 burgers. Other ingredients will cost \$0.20 per burger. Joe will also have to hire a cook for \$1,200 per month. Other additional costs will run about \$360 a month.

1. If Joe only sells beer how many glasses a month does he have to sell to make a \$2,000 profit?

2. If Joe only sells beer how many glasses a month does he have to sell to make a monthly profit of 5% of sales?

3. How many burgers does he need to sell to break even on burgers? Assume that there is no effect on beer sales.

4. Suppose that 2,000 extra customers per month came because of the burgers and they bought on average 1.5 beers. Compute the added profit or loss generated by the extra customers.

5. Joe was not sure how many new customers would come because of the burgers. Give Joe advice on how many new customers is needed just to break even if each customer bought one beer and one burger. Include an assessment of the consequences of volume falling below or above this break-even point.

6. Joe could offer a higher quality burger if he spends 50% more on ingredients. He could then charge \$2.00 for them. Explain if these burgers would be more profitable then the other ones.

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#### Solution Preview

The average price of beer at Joes pub is \$3.00 per glass and each glass on average costs Joe \$2.20. Joe has hired a bartender and waiter at \$3,000 and \$2,000 per month respectively. His rent utilities and other fixed operating costs are \$5,000 per month. Joe is considering selling hamburgers for 1.25 each to attract customers. Joe would buy buns for \$1.20 a dozen and ground beef for \$2.80 per pound. Each pound of beef will make 7 burgers. Other ingredients will cost \$0.20 per burger. Joe will also have to hire a cook for \$1,200 per month. Other additional costs will run about \$360 a month.

1. If Joe only sells beer how many glasses a month does he have to sell to make a \$2,000 profit?
Each glass of beer's revenue is \$3.00, variable cost is \$2.20, so profit is \$3.00 - \$2.20 = \$0.80.
Every month, fixed costs of a bartender, waiter, rent utilities and other fixed operating costs (not including cook or other additional costs) total \$3,000 + \$2,000 + ...

#### Solution Summary

Analysis of fixed and variable costs to determine the necessary sales/revenues needed for break-even points and calculation of profits.

\$2.19
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## CVP Analysis

Howard Beal co. manufactures molds for casting aluminum alloy test samples. Fixed costs amount to \$20,000 per year. Variable costs for each unit manufactured are \$16. Sales price per unit is \$28.

a. What is the contribution margin of the product?
b. Calculate the break-even point in unit sales and dollars.
c. What is the operating profit (loss) if the company manufactures and sells:
(i) 1,500 units per year?
(ii) 3,000 units per year?

d. Plot a break-even chart using the foregoing figures.

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