Numerical problem.

We did problem 6.1 in class.

Some points to remember (hints):

Depreciation is 5 years / 20% factor which is a Fixed Cost.

Interest expense is calculated annually (Principal amount borrowed x Interest rate) and is also a fixed cost. The textbook calls the fixed costs “Known Costs”; it’s the same thing.

What do you need to do.

1. Setup the Contribution Margin Statement format (your template) and enter in what you know.

Contribution Margin Statement – Template

Dollar Amounts

Percentage

Sales

– Variable Costs

= Contribution Margin

– Fixed Costs

=Operating Income

-Taxes

=Net Income

NOTE: You do NOT need to enter your answers on this paper/page. You do NOT need to use my template, you can make your own if you prefer.

2. Use Bottoms up method or formulas in textbook and compute Breakeven Sales for the restaurant.

3. The owner wants to earn at a MINIMUM:

22% after income tax on the owner’s present investment of $80,000,

income tax rate is 28%.

This step should be part of your answer to step 1 when you set up the original contribution margin statement (template).

**** Calculate the SALES required to provide this minimum level of Net Income for the restaurant.

4. Table and Graph time.

Hint: How many points do you need to create a line? The answer is 2.

So make your cost and profit table:

What is the fewest number of rows you need to make your graph? See Hint above.

4a. Fill in your table

Sales (level of activity)

Fixed Cost

Variable Cost

Total Cost

Operating Income

4b. Using the graph paper attached or graph paper that you have in your school supplies, construct a neatly drawn, Cost – Volume – Profit graph.

Hint: The Sales Revenue line is y = x; draw that line in first.

Required: draw the total cost line

Optional: you can also draw the fixed cost line and the variable cost line (You must draw *required* the total cost line (3 lines).

4c. Show the Breakeven point on your graph. What is the amount according to the graph? How does it compare with your answer to breakeven in part 2 of this question (above). Hopefully, it is pretty close.