Chapter 10, Question 7 J. D. McAllister is really happy. He has just succeeded in securing a $2,000,000 bank loan with a variable percentage interest rate to build his dream restaurant. J. D.'s loan is for 25 years, and it carries an interest rate that is set at 7 percent for the first year (this year). Thus, his first year's monthly interest payments will be $14,136. An experienced restaurateur, J. D. has prepared the following annual budget for this year Annual Budget for This Year Total Sales $2,046,000.00 Variable Costs Food Beverage Labor Other Variable Costs 429,660.00 257,796.00 572,880.00 171,864.00 $1,432,200.00 Total Variable Costs Fixed Costs (excluding loan repayment) Loan Repayment (7% interest) Total Fixed Costs $239,568.00 169,632.00 $409,200.00 Before Tax Profit Taxes (40%) After Tax Profit $204,600.00 81,840.00 $122,760.00 J. D.'s interest rate will likely vary over the life of the loan because it is tied to the prime interest rate established by the Federal Reserve Board (part of the federal government). Assume the Fed increases interest rates next year by 0.5 percent, and thus J. D.'s interest rate moves to 7.5 percent. As a result, his new monthly loan repayment will be $14,780 Also assume that his total variable cost percentage and fixed costs (excluding the increased loan repayment) will be the same next year, and his check average (selling price) will be $20 per cover. With the higher mortgage payment, what sales dollars and number of guests served will J. D. need to achieve next year to maintain the same number of after-tax profit dollars as he budgeted for this year? Per Unit (Guest) Percentage SP VC CM Fixed costs (excluding loan repayment) Loan repayment (7.5% interest) Total fixed costs Desired after-tax profift Tax rate Before-tax profit Sales dollars to achieve desired after-tax profit Guests served to achieve desired after-tax profit Chapter 10