The sale price will be 3.50 for a hot dog, potato chips and a drink. The project

Question

The sale price will be 3.50 for a hot dog, potato chips and a drink. The projected cost per sale is 1.35. Condiments are projected to be $ .35 per sale. The hot dog cart will be leased for a 12 month period for $ 425 per month. Liability insurance will be $ 1,200 per year. The owner wants to earn $ 20,000 per year and assumes a tax rate of 20%. An annual profit is projected to be $ 10,000.

.

1 What are the total variable costs per unit?

2 What is the contribution margin ratio?

3 What are the total fixed costs?

4 What are the total expenses per the income statement?

5 How many units must be sold per year?

6 If the sales price changes to $ 4.00 and the owner salary changes to $ 15,000, how many units must be sold?

Explanation / Answer

Answer 1 The total variable costs per unit Cost per sale $1.35 Condiments per sale $0.35 Total Variable cost per unit $1.70 Answer 2 Contribution Margin ratio = (Selling price per unit - Variable cost per unit) / Selling price per unit Contribution Margin ratio = ($3.50 - $1.70)/$3.50 = 51.43% Answer 3 Total fixed costs = Lease charges + Insurance + Salary = ($425*12) + $1200 + $20000 = $26300 Answer 4 Total expenses per the Income statement = (No.of sale units * Variable cost per unit) + Fixed Cost Total expenses per the Income statement = (No.of sale units * $1.70) + $26300 Answer 5 No.of units must be sold per year = (Fixed expenses + Before tax required profit) / Contribution margin per unit Before tax required profit = Projected annual profit / (1 -tax rate) = $10000 / (1-0.20) = $12500 Contribution margin per unit = Selling price - Variable cost = $3.50 - $1.70 = $1.80 per unit No.of units must be sold per year = ($26300 + $12500) / $1.80 = 21555.56 units Answer 6 Revised Fixed expenses = $26300 - $5000 = $21300 Contribution margin per unit = Selling price - Variable cost = $4 - $1.70 = $2.30 per unit No.of units must be sold per year = ($21300 + $12500) / $2.30 = 14695.65 units

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