Stop-n-Shop operates a downtown parking lot containing 800 parking spaces. The lot is open 2,500 hours per year. The parking charge per car is 50 cents per hour; the average customer parks two hours. Stop-n-Shop rents the lot from a development company for $7,250 per month. The lot supervisor is paid $24,000 per year. Five employees who handle the parking of cars are paid $300 per week for 50 weeks, plus $600 each for the two-week vacation period. Employees rotate vacations during the slow months when four employees can handle the reduced load of traffic.

Lot maintenance, payroll taxes, and other costs of operating the parking lot include fixed costs of $3,000 per month and variable costs of 5 cents per parking-space hour.

Instructions

a. Draw a cost-volume-profit graph for Stop-n-Shop on an annual basis. Use thousands of parking-space hours as the measure of volume of activity. [Stop-n-Shop has an annual capacity of 2 million parking-space hours (800 spaces? 2,500 hours per year).]

b. What is the contribution margin ratio? What is the annual break-even point in dollars of parking revenue?

c. Suppose that the five employees were taken off the hourly wage basis and paid 30 cents per car parked, with the same vacation pay as before. (1) How would this change the contribution margin ratio and total fixed costs? (2) What annual revenue would be necessary to produce operating income of $300,000 under these circumstances?