A cocktail bar is currently doing $582,000 a year in sales revenue. Liquor cost is 38% and other variable costs at this level of sales revenue are 28%.

Fixed costs are $150,000.

a. What is the annual operating income (before tax)?

b. The owner wants to increase the manager’s salary by $12,000 a year.

By how much will sales revenue have to increase to provide this additional salary and maintain the current level of operating income?

(Any added sales revenue will come from increasing seat turnover by increasing customer service.)

c. Rather than increasing sales revenue by increasing seat turnover and customer service, the owner decides to increase menu prices by 6%.

The owner believes the price increase can be made without losing any customers and without increasing cost of sales or other variable costs.

The original variable cost functions and the manager salary increase still apply. What will the bar’s operating income (before tax) be?

d. With the new pricing structure as indicated in part

c, how much can sales revenue decrease before operating income falls below $30,000 a year?

LO1