1. Denver doughnuts is considering a new store location. For accounting purposes
ID: 2735535 • Letter: 1
Question
1. Denver doughnuts is considering a new store location. For accounting purposes, fixed operationg costs for a store are $23,500 a year, and variable costs are 40% of sales. Compute the break-even sales level for a store location.
a) if average revenue per customer is $1.40, how many customers must be served each hour to break even in earnings? (The stores are open 24hrs a day, 365 days a year)
b) If the price (only) is raised 10%, what wil;l be the new earnings break-even point?
2. For Denver Doughnuts, fixed cash outlays are $18,750 a year at each location, and variable cash outlays are 40% of sales. A store requires an initial outlay of $60,000, and the company uses a 14% required return. Because of changing neighborhood characteristics, the company does its analysis based on a 10 year store life. Since the locations are leased, the terminal value is minimal. Ignore taxes for simplicity.
a) what annual sales volume will be needed to generate a net present value of $0?
b) the after tax risk-free interest rate is 6%. what annual sales value will be needed to generate a net present value of $0 using a 6% discount rate?
Explanation / Answer
Answer : Question 1
a)
b)
Break even point will remain same as the there is no change either the fixed cost or variable cost ration.
In $ A Fixed Operating cost 23500 Variable cost ratio 0.4 B (1-variable cost ratio) 0.6 C A/B -Break Even sales 39166.67Related Questions
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