Selling hotdogs. During a typical month, the stand reports a profit of $9,000 wi

Question

Selling hotdogs. During a typical month, the stand reports a profit of $9,000 with sales of $50,000, fixed costs of $21,000 and variable costs of $0.64 per hot dog.

Next yr, the company plans to start selling nachos for $3.00 per unit. Nachos will have a variable cost of $0.72 and new equipment and personnel to produce nachos will increase monthly fixd costs by $8,808. Initial sales of nachos should total 5,000 units. Most of the nacho sales are anticipated to come from current hot dog purchasers, therfore, monthly sales of hot dogs are expected to decline to $20,000. After the first year of nacho sales, the company president beleives that hot dog sales will increase to $33,750 a month and nacho sales will increase to 7,500 units a month.

a. determine the monthly breakeven sales in dollars before adding nachos.

b. determine the monthly breakeven sales during the first year of nacho sales, assuming a constant sales mix of 1 hotdog and 2 units of nachos.

Explanation / Answer

Sales Mix

Break Even Sales = Fixed Cost / P.V Ratio P/V ratio = Contribution / Sales *100 Contribution = Fixed Cost + Profit = 21000 + 9000 = $30,000 P/V ratio = 30000 / 50000*100 = 60% Break Even Sales = 21000/60% = $35,000 Variable cost Ratio = 1 - P.V ratio = 1-60% = 40% Variable cost 40% = 0.64 Sales 100% = ? = 0.64*100/40 Selling price per unit = $1.6 Total units = 50000 / 1.6 = 31250 units

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