Lolpark Concessions currently sells hot dogs. During a typical month, the stand
ID: 2463141 • Letter: L
Question
Lolpark Concessions currently sells hot dogs. During a typical month, the stand reports a profit of $9,000 with total sales of $48,000 (30,000 hot dogs @ $1.6 per hot dog), fixed costs of $21,000, and variable costs of $0.6 per hot dog. For next year, the sales manager proposes to start selling nachos for $3 per unit. Nachos will have a variable cost of $1.00 and new equipment and personnel to produce nachos will increase monthly fixed costs by $7,000. The sales of nachos is expected to be 10,000 units per month. Most of the nacho sales are anticipated to come from current hot dog purchasers, therefore, monthly sales revenue of hot dogs are expected to decline to $32,000. Required: (Ignore income tax) a. Determine the number of hot dogs and nachos that should be sold every month to breakeven during the first year of introducing nachos. b. Should the company add nachos as a new line of business? Lolpark Concessions currently sells hot dogs. During a typical month, the stand reports a profit of $9,000 with total sales of $48,000 (30,000 hot dogs @ $1.6 per hot dog), fixed costs of $21,000, and variable costs of $0.6 per hot dog. For next year, the sales manager proposes to start selling nachos for $3 per unit. Nachos will have a variable cost of $1.00 and new equipment and personnel to produce nachos will increase monthly fixed costs by $7,000. The sales of nachos is expected to be 10,000 units per month. Most of the nacho sales are anticipated to come from current hot dog purchasers, therefore, monthly sales revenue of hot dogs are expected to decline to $32,000. Required: (Ignore income tax) a. Determine the number of hot dogs and nachos that should be sold every month to breakeven during the first year of introducing nachos. b. Should the company add nachos as a new line of business?Explanation / Answer
(a)
Number of units sold for Hot dog = $32000 / $1.60/unit = 20000 units
Number of units sold for Nacho = 10000 units
Total contribution = = $1/unit x 20000 units + $2/unit x 10000 units = $40000
Weighted contribution per unit = $40000 / (10000+20000)units = $1.333 / unit
Total Fixed cost = $21000 + $7000 = $28000
Break even point in units of sales mix = Fixed cost / weighted contribution per unit = $28000 / $1.333 /unit = 21000 units
salex mix ratio:
Hot Dog: Nacho = 20000 : 10000 = 2:1
Break even sales of Hot Dogs = (2/3) x 21000 = 14000 units
Break even sales for Nacho = (1/3) x 21000 = 7000 units
(b)
The addition of Nacho has increased the profit to $12000 from $9000. Nacho should be added.
Hot Dogs Nacho Selling price per unit $ 1.60 $ 3.00 variablce cost per unit $ 0.60 $ 1.00 Contribution per unit $ 1.00 $ 2.00Related Questions
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