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Question 2:The Express Banquet has two restaurants that are open 24-hours a day. Fixed costs for the tworestaurants together total $459,000 per year. Service varies from a cup of coffee to full meals. Theaverage sales check per customer is $8.50. The average cost of food and other variable costs foreach customer is $3.40. The income tax rate is 30%. Target net income is $107,100.Required.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 $107,100?3. Compute net income if the number of customers is 170,000

Question

Question 2:The Express Banquet has two restaurants that are open 24-hours a day. Fixed costs for the tworestaurants together total 459,000peryear.Servicevariesfromacupofcoffeetofullmeals.Theaveragesalescheckpercustomeris459,000 per year. Service varies from a cup of coffee to full meals. Theaverage sales check per customer is 8.50. The average cost of food and other variable costs foreach customer is 3.40.Theincometaxrateis303.40. The income tax rate is 30%. Target net income is 107,100.Required.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 $107,100?3. Compute net income if the number of customers is 170,000

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Solution

  1. To compute the revenues needed to earn the target net income, we first need to calculate the pre-tax income. This is done by dividing the target net income by (1 - tax rate).

    Pre-tax income = 107,100/(1−0.30)=107,100 / (1 - 0.30) = 152,857.14

    Then, we add the fixed costs to the pre-tax income to get the total required revenue.

    Total required revenue = Pre-tax income + Fixed costs = 152,857.14+152,857.14 + 459,000 = $611,857.14

  2. To calculate the number of customers needed to break even, we first need to calculate the contribution margin per customer. This is done by subtracting the variable cost per customer from the sales check per customer.

    Contribution margin per customer = Sales check per customer - Variable cost per customer = 8.50−8.50 - 3.40 = $5.10

    Then, we divide the fixed costs by the contribution margin per customer to get the number of customers needed to break even.

    Number of customers to break even = Fixed costs / Contribution margin per customer = 459,000/459,000 / 5.10 = 90,000 customers

    To calculate the number of customers needed to earn the target net income, we add the pre-tax income to the fixed costs and divide by the contribution margin per customer.

    Number of customers to earn target net income = (Pre-tax income + Fixed costs) / Contribution margin per customer = (152,857.14+152,857.14 + 459,000) / $5.10 = 120,000 customers

  3. To compute the net income if the number of customers is 170,000, we first calculate the total revenue and total variable costs.

    Total revenue = Number of customers * Sales check per customer = 170,000 * 8.50=8.50 = 1,445,000

    Total variable costs = Number of customers * Variable cost per customer = 170,000 * 3.40=3.40 = 578,000

    Then, we subtract the total variable costs and fixed costs from the total revenue to get the pre-tax income.

    Pre-tax income = Total revenue - Total variable costs - Fixed costs = 1,445,000−1,445,000 - 578,000 - 459,000=459,000 = 408,000

    Finally, we subtract the income tax from the pre-tax income to get the net income.

    Net income = Pre-tax income * (1 - tax rate) = 408,000∗(1−0.30)=408,000 * (1 - 0.30) = 285,600

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