As a prospective owner of a club known as the Red Rose, you are interested in de

Question

As a prospective owner of a club known as the Red Rose, you are interested in determining the volume of sales dollars necessary for the coming year to reach the break-even point. You have decided to break down the sales for the club into four categories, the first category being beer. Your estimate of the beer sales is that 32,000 drinks will be served. The selling price for each unit will average $1.50; the cost is $0.75. The second major category is meals, which you expect to be 10,000 units with an average price of $10.00 and a cost of $5.50. The third major category is desserts and wine, of which you also expect to sell 8,000 units, but with an average price of $2.25 per unit sold and a cost of $1.25 per unit. The final category is lunches and inexpensive sandwiches, which you expect to total 22,500 units at an average price of $6.00 with a food cost of $3.25. Your fixed cost (i.e., rent, utilities, and so on) is $2,000 per month plus $2,400 per month for entertainment. What is the monthy break even point in dollars

Explanation / Answer

Expected gross profit = 32000*(1.5-0.75)+10000*(10-5.5)+8000*(2.25-1.25)+22500*(6-3.25) = $ 138,875

Expected revenue = 32000*1.5+10000*10+8000*2.25+22500*6 = $ 301,000

Expected gross margin = 138875/301000 = 46.14%

Monthly break even point in dollars = Total fixed cost / expected gross margin = (2000+2400)/46.14% = $ 9,537

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