A neighborhood restaurant opens for lunch only and has a menu limited to five meals. The history of each menu item relative to its percentage of total sales revenue (SR%), selling price (SP), and variable costs (VC) is shown in the following table:

Total variable cost of beverages averages 55%. The restaurant has fixed costs of $546,000 a year and wants an operating income (before tax) of at least $25,000 a year.

a. What level of sales revenue will give the desired operating income before tax?

b. Due to the low sales of menu item 5 and its relatively high variable cost percentage, the owner is considering removing this item from the menu.
It is anticipated that guests who formerly favored item 5 will split evenly over the remaining four menu items. The owner also believes improved cost control can reduce the beverage variable cost from 55% to 52%.
Given these assumptions are valid, what level of sales revenue will be necessary to provide $25,000 of operating income (before tax)?

c. Assuming that $1,200,000 in sales revenue was achieved, what would be the restaurant’s operating income (BT) using the information in part b?LO1

Transcribed Image Text:

Menu Item SP VC SR% Food 1 $15.00 $7.75 16% Food 2 12.95 7.50 20% Food 3 11.00 5.50 22% Food 4 8.95 2.85 14% Food 5 9.95 6.50 8% Beverages 20% 100%