Revision question on how to calculate break-even point and margin of safety.

Revision question on how to calculate break-even point and margin of safety
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Bonne Bia limited is a newly formed company in the catering business founded by Kate and Paul Johnson. Kate and Paul have considerable experience in the food industry and saw an opportunity to establish a food/beverage business to service the tourist market during the four months from May to August. The business will be located in Wexford and permission has been obtained from Wexford County Council (WCC) to operate a food/beverage outlet near Curracloe beach. At present Kate and Paul are trying to decide between two possible food/beverage options. Pertinent information relating to each of the options is shown below. Initially, Kate and Paul intend to operate the outlet themselves without employing any other staff.

Option 1 – Crepes on the Beach

The food outlet would offer french style crepes with a variety of fillings.

Costings

rather than having a range of selling prices a fixed price has been set for each crepe and this price is midway between the highest and lowest prices expected. Additionally, an average variable ingredient cost has been computed based on possible crepe fillings. Other relevant information is as follows:

Selling price per crepe (Budgeted sales 16,800 crepes) €3.20
Average variable ingredient cost per crepe €1.20
Other variable costs (disposable cutlery, packaging etc.) 20% selling price
licence fee payable to WCC €1,600
rent of premises (including tables, chairs etc.) per month €2,000
Insurance for the four-month period €1,296
  Option 2 – Coffee dreams This beverage outlet would offer a range of beverages using the highest quality coffee beans.  

Costings

Again a fixed price has been set for all coffee beverages and this price is midway between the highest and lowest prices expected. Additionally, an average variable ingredient cost has been computed based on milk, cream and other flavorings that may be used in making the various coffee drinks.

To create the coffees a special barista machine is required. This machine may be rented from a well-known coffee company on a monthly basis. The monthly rental is €1,006 plus €0.125 per cup of coffee produced. Other relevant information is as follows:

Selling price per cup of coffee (Budgeted sales 12,000 cups of coffee) €3.50
Average variable ingredient cost per cup of coffee €0.75
Other variable costs (disposable cups, spoons, etc.) 10% selling price
licence fee payable to WCC €1,600
Rent of premises (including tables, chairs etc.) per month €2,000
Insurance for four-month period €1,296

REQUIREMENT:

(a)     for eACH option:

(i)       Calculate the break-even point in sales revenue.   

(ii)      If Bonne Bia limited requires a profit of €17,500, how many units must be sold?  

(iii)     If actual sales achieved are equal to budgeted sales, compute the margin of safety in units and percentages.

(b)     recommend which option Bonne Bia limited should choose giving reasons for your answer

Author: amidu edson

I am certified accountant with more than 5 years of teaching experience. Currently am teaching auditing and assurance, management accounting and financial accounting for student preparing for professional exams such as ACCA and CPA.

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