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Red Rose Club: Calculate Break Even Point in sales

S7.25 As a prospective owner of a club known as the Red Rose, you are interested in determining the volume of sales dollars necessary for the coming year to reach the break-even point. You have decided to break down the sales for the club into four categories, they are as follows:

Category Estimated Sales Cost per unit Sales price per unit
Beer 30,000 $0.75 $1.50
Meals 10,000 $5.00 $10.00
Dessert/Wine 10,000 $1.00 $2.50
Lunches/Sandwiches 20,000 $3.25 $6.25

Your fixed cost (that is, rent, utilities, and so on) is $1800 per month plus $2,000 per month for entertainment. Make the problem more realistic by adding labor cost (as a variable cost) at one-third the total cost of meals and sandwiches. Also add variable expenses (kitchen supplies, tablecloths, napkins, etc.) at 10% of the food cost for each category.

a) What is your break even point?
b) If you expect to make an annual profit of $35,000 (before taxes) for your 12-hour days, what must your total sales be?

Solution Summary

How to determine the sales volume at which profit is 0 i.e. the break even point where sales revenue equals the total cost?