Question
Adam Gibbs is the owner of Country Burger in a small town in rural Ontario. There are three specialty burgers on Country Burgers menu (price
Adam Gibbs is the owner of Country Burger in a small town in rural Ontario. There are three specialty burgers on Country Burgers menu (price per burger shown in brackets); the Double Bacon Burger ($7.50), Double Beef Burger ($8.40), and the Double Chicken Burger ($9.40). Adam personally inspects each burger and ensures that they are served heaping with toppings to meet customer expectations for an experience they cannot find at other restaurants. The Country Burger restaurant closes in the winter months when the number of tourists visiting town decreases significantly. Adam would like to know the minimum number of burgers she needs to sell in order to break even. He intends to use this information to determine how long he should continue to operate the restaurant into the fall season. The common fixed costs shown below can be avoided if Adam closes the restaurant; other fixed costs such as property taxes cannot be avoided and are therefore excluded from the analysis below. Below are the partial financial results of August, the most recent month of operations.
Double Bacon Burger Double Beef Burger Double Chicken Burger Total Sales $5,775 $11,256 $20,304 $37,335 Variable expenses: Chicken - 1,826 1,826 Ground beef 2,736 2,736 Bacon 1,368 - - 1,386 Cheese 208 236 244 688 Buns 98 176 268 542 Other 268 654 678 1,600 Total variable cost $1,942 $3,802 $3,016 $8,760 Contribution margin $3,833 $7,454 $17,288 $28,575 Common fixed expenses $16,332 Operating income $12,243
1. Calculate the contribution margin for each burger sold at the Country Burger restaurant.
2. Determine the break-even point in units (round to whole units) required for Adam to cover all fixed costs, assuming the current sales mix and costs do not change. Prepare a break-even income statement.
3. Determine the break-even point in sales dollars.
4. Calculate Country Burgers degree of operating leverage (DOL). 5. The following are Country Burgers expected volume of burger sales: September, 4,800; October, 4,200; November, 3,600; December, 2,800. Assuming the same product mix and the same common fixed expenses as August, and that Adam requires a profit of at least $10,000, when should Adam close the restaurant for the season?
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