Tim Stokes recently invested $325,000 to acquire the RoOyster, a restaurant on Vancouver Island. RoOyster meals sell for an average of $30 and the average variable cost per meal is $8. Tim believes that by reducing newspaper advertising, he can reduce fixed costs by 10 per cent from their current level of $12,000 per annum. Other fixed costs amount to $100,000 per annum.

a) What will be the restaurant’s breakeven level of sales in units and dollars subsequent to the reduced advertising?

b) Assuming the reduced level of advertising, determine how many meals must be sold if Tim wants to earn a 20 per cent after tax annual rate of return on his investment. Assume the restaurant’s profits are subject to a 35 per cent tax rate.