The owner/manager of a beverage and food retail outlet intends to invest $400,000 in another retail store. He wants to make at least $75,000 in profit before taxes, or 18.75% return on his investment. Based on his market study, he estimates selling 200,000 coffees, 100,000 donuts, 75,000 sandwiches, and 75,000 soups. The unit selling prices for these products are $1.75 for coffee, $1.00 for donuts, $2.25 for sandwiches, and $1.75 for soups. Based on current purchasing costs from existing suppliers, his cost of sales are estimated at 15%, 20%, 40%, and 25% of revenue for coffee, donuts, sandwiches, and soups, respectively. His other annual costs include rent ($100,000), salaries ($235,000), heating and hydro ($45,000), municipal taxes ($35,000), and a variety of other costs ($40,000).
1. With the above information,
(a) Construct the statement of income
(b) Calculate the owner/manager’s break-even point in dollars.
2. If his cost of sales was reduced by 10%, how would that affect his break-even point?
3. If his rent and salaries increase by $25,000 and $50,000, respectively, how would these changes affect his break-even point (assume that the variable costs remain at the original estimate)?
4. If the changes in both 3 and 4 above take place simultaneously, how would these changes affect his break-even point?
5. If the owner/manager wants to make a $150,000 profit before taxes based on his original cost estimates, how much revenue must his retail outlet generate?