Best friends, Nathan and Cody, decided to start their own business which would b

Question

Best friends, Nathan and Cody, decided to start their own business which would bring authentic Mexican food to their local communities. Together they have started the Great Tamale, a food cart. Nathan is the chef, having spent considerable time studying Mexican cuisine abroad. Cody takes the orders and manages the business operations.

Thanks to an appearance on the Food Network, the Great Tamale food cart has experienced a phenomenal first year. In its first year of operations the company sold 31,125 plates of food and had the below sales and cost figures.

The best friends worked tirelessly in their first year of operations and know that another challenging and competitive year lies ahead of them. Now entering their second year of operations, they are considering two alternatives and have hired your consulting group, known for its inventive business and accounting consulting work, to help them make some important business decisions.

Alternative 2 - Restaurant

Nathan and Cody notice there is stiff competition in the food cart and food truck industries and therefore are considering opening a traditional restaurant.

Opening a restaurant would have many advantages and disadvantages, the company can expect fixed costs to increase by $125,000 a year to cover rent, equipment, furniture, salaries and other costs.

This alternative is exclusive of alternative 1 -so use the original financial information from page 1 (also shown below) to calculate the effects of opening a restaurant.

Additional Information:

This alternative would allow GT to increase their plate prices to $14.50 and would increase the variable cost per unit by $2.50. Assume plate sales remain at 31,125.

1) Compute the company's new contribution margin under this alternative. Compute the contribution margin both in total dollars and per unit

2) Compute the company's contribution margin ratio under both scenarios. (Note: Do not round the CMR for accurate calculations in the following questions).

3) Compute the break-even point in sales dollars under each scenario. How many plates will need to be sold under each situation to break-even?

4) If the company wishes each scenario, food cart and restaurant, to generate target income $250,000, what is the amount of sales that needs to be generated? How many plates will then need to be sold? Prepare a contribution margin statement for this step and verify that your before tax income is $250,000 (after-tax net income in fact equals $170,000) for both the food cart and restaurant

5) Assume that the company expects sales to decline by 20% next year. There will be no change in plate price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two types (assume a 32% tax rate, and that any loss before taxes yields a 32% tax savings).

Explanation / Answer

Ans 1 Income Statement Amount No. of selling plates 31125 Sales $14.5*31125 451312.5 Less: Variable Cost (4*31125) 124500 Contribution margin 326812.50 Contribution per unit 10.50 Less: Fixed Expenses (90000+125000) 215000 Income Before taxes 111812.5 Income Tax (32%) 35780 Net Income 76032.5 working Variable Cost Old variable cost 46687.5/31125 1.5 Increase in variable cost 2.5 New Variable Cost 4 Ans 2 Present scenario New Scenario CM Ratio Contribution Margin/Sales 0.78571 0.72414 171187.5/217875 326812.5/451312.5 Conrtibution margin per unit 5.5 10.50 Ans 3 Breakeven in units 16364 20476 roundoff Fixed cost/Contribution margin per unit 90000/5.5 215000/10.5 Breakeven in $ 114284.3 296903.9 90000/.78751 215000/.72414 Ans 4 targeted Sales=Fixed Cost+Net income befor tax/Contribution per unit Old scenerio New scenerio Target plates 61818 44286 (90000+250000)/5.5 (215000+250000)/10.5 Sales Revenue 432727.3 642142.9 Less: variable cost 92727.3 177142.9 Contribution margin 340000.0 465000.0 Less: fixed Cost 90000 215000 Net Income before tax 250000.0 250000.0 Income Tax (32%) 80000 80000 Net INCOME 170000.0 170000.0 Ans 5 Old scenerio New scenerio Income Statement Amount Income Statement Amount No. of selling plates 24900 No. of selling plates 24900 Sales $7*24900 174300 Sales $14.5*24900 361050 Less: Variable Cost (1.5*24900) 37350 Less: Variable Cost (4*24900) 99600 Contribution margin 136950.00 Contribution margin 261450.00 Contribution per unit 5.50 Contribution per unit 10.50 Less: Fixed Expenses 90000 Less: Fixed Expenses (90000+125000) 215000 Income Before taxes 46950 Income Before taxes 46450 Income Tax (32%) 15024 Income Tax (32%) 14864 Net Income 31926 Net Income 31586

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.