The Home Style Eats has two restaurants that are open 24...

The Home Style Eats has two restaurants that are open 24 hours a day. Fixed costs for the two restaurants together total 430,500per year. Service varies from a cup of coffee to full meals. The average sales check per customer is 8.75 .The average cost of food and other variable costs for each customer is 3.50 . The income tax rate is 36 \% .Target net income is 117,600. 1. Compute the revenues needed to earn the target net income. 2. How many customers are needed to break even? To earn net income of $\$ 117,600 ?$ 3. Compute net income if the number of customers is 170,000 .

The Home Style Eats has two restaurants that are open 24 hours a day. Fixed costs for the two restaurants together total 430,500per year. Service varies from a cup of coffee to full meals. The average sales check per customer is 8.75 .The average cost of food and other variable costs for each customer is 3.50 . The income tax rate is 36 \% .Target net income is 117,600. 1. Compute the revenues needed to earn the target net income.
2. How many customers are needed to break even? To earn net income of $\$ 117,600 ?$
3. Compute net income if the number of customers is 170,000 .

Key Concepts

Fixed Costs

Fixed costs are expenses that do not change with the level of production or sales volume, such as rent, salaries, and utilities. They must be paid regardless of how many customers are served, and they form the base over which additional revenues must be generated to cover all operating expenses.

Variable Costs

Variable costs fluctuate in direct proportion to the activity level or volume of customers. These costs include items such as food and ingredient costs that scale with each customer served. Understanding variable costs is essential for calculating the profitability per additional sale.

Contribution Margin

The contribution margin is the difference between the sales revenue per customer (or unit) and the variable cost per customer. It indicates how much revenue remains to cover fixed costs and contribute to profit after the variable expenses are covered. A higher contribution margin means more funds are available to offset fixed costs and achieve break-even or target net income.

Break-Even Analysis

Break-even analysis determines the level of sales (or number of customers) required to cover all fixed and variable costs, resulting in no net profit or loss. It is a critical tool in financial planning that helps businesses understand how changes in cost structures or sales volume impact profitability.

Target Net Income

Target net income is the desired profit a business aims to achieve after accounting for all costs and taxes. It guides decision making in setting sales goals and pricing strategies to ensure that revenue projections are aligned with financial objectives.

Income Tax Impact

The income tax impact refers to the effect of taxes on a company’s pre-tax earnings. Since a percentage of the earnings goes to taxes, the required pre-tax income must be higher than the target net income to achieve the desired after-tax profit. This concept ensures that financial planning correctly incorporates statutory tax obligations.

Transcript

00:01 Hi guys, in this problem, we're going to perform a cost volume profit analysis, which is referred to as a break -even analysis.

00:09 Okay, so it's a technique that helps in determining the sales and costs incurred in the business, and it helps to determine the relationship between revenue costs and profits, and also it remains, determines the number of profits, a number of loss points, and the business, and it's the point at which the revenues are equal to.

00:30 Costs and the process stands nil.

00:33 So under this analysis it's assumed that sales price and cost per unit both faxed and variable are constant.

00:40 So it's mainly used in the session making process by the management.

00:44 Okay.

00:45 So now we're going to perform pre -even units.

00:49 Okay.

00:50 So the pre -avian point is equals to the faxed costs over the contribution margin per unit.

00:57 Okay.

00:59 So in part one, we need to compute the revenues to earn target income as the sales of desired profit.

01:09 Sales here is equal to the faxed costs, which is $430 ,000 and $500.

01:18 Okay, plus the desired profit, which is $117 ,600.

01:28 Okay.

01:29 Times 1 minus 0 .36 over the contribution martian period which is we have 60 % or 0 .6.

01:44 So the sales of desired profit here is 1 ,023 ,750.

01:57 Okay.

01:58 Okay, this revenue is to earn target income at this number.

02:04 Then we need to compute the contribution margin ratio.

02:10 So it's equal to the selling price, which is $8 .75 minus a variable cost per unit, which is $3 .5.

02:22 Okay, over the selling price.

02:25 Okay, so it's eight point seven...

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