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, selling price (SP), and variable costs (VC) are shown in the following:

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

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

b. Because of the low sales of menu item 5 and its relatively high variable cost percentage, management is considering removing this item from the menu. It is believed customers who formerly favored this item would then be split evenly over the remaining four menu items.
Management also believes that improved cost control can reduce the beverage variable cost from 55 percent to 52 percent. Given these assumptions are valid, what level of 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 before tax using the information in part b?

Transcribed Image Text:

Menu Item SP VC SR% Food 1 $15.00 $7.75 16% Food 2 12.95 7.50 Food 3 11.00 5.50 Food 4 8.95 2.85 Food 5 9.95 6.50 2218 20 22 14