A sandwich shop has been doing business for 10 years in Pinecrest. The shop curr
ID: 2754011 • Letter: A
Question
A sandwich shop has been doing business for 10 years in Pinecrest. The shop currently operates out of a building that is paid for. The variable overhead expenses are 10% of the sales each sandwich. Each sandwich has a food cost of $1. All the sandwiches sell for $5 each.
At the new location in the Falls area, the monthly cost of rent will be $6,000. The sales price will also be $5, with a food cost of $1 ,and 10% overhead expense of price of each sanchwich sold.
a)What is the break even in dollars and b) units for the new location?
c) How much will the new shop need to sell to generate a monthly profit of $12,000.
Explanation / Answer
Answer for question a and b:
Given variable overhead expense =10% of sales. = 10% of $5 =$0.50
Food cost of the sandwich =$1.
Selling price of the sandwich=$5.
Contribution per sandwich= selling price - Food cost - Variable overhed
=$5- $1 -$.50
=$3.50.
Monthly rent =$6,000.
Break eve point in dollars is the sales value at which the business earns no profit no loss.
To arrive at the break even units of sandwiches to be sold, formula = Fixed expenses/Contribution per unit.
$6,000/$3.50
=1714.285 units rounded to 1,715 units of sandwiches must be sold to reach break even point.
Break even sales value =number of units to be sold to break even * price per sandwich.
=1,715 * $5
=$8,575.
Answer for question no.c:
Desired profit =$12,000.
Number of units to be sold to earn the desired profit = (Fixed expenses to be covered+desired profit)/Contribution per unit
=($6,000+$12,000)/$3.50
=5,142.857 units rounded to 5,143 units of sandwichs.
Sales value to be achieved to earn a desired profit of $12,000 =5,143 *$5
=$25,715
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