Question 1

My neighbor, a retired police officer, opened a wine bar on Main Street in Huntington Beach. He sells wine by the bottle or by the glass, craft beers and crackers and cheese. Lets see if we can estimate whether the business actually makes a profit using our knowledge of cost behavior and cost-volume-profit analysis. Here are some revenue and cost assumptions:

General Assumptions

• Assume the craft beer sales and food sales are not material to profitability.
• The business makes a 100% markup on wine sales whether by the bottle or by the glass.
• The average bottle of wine has a cost of $25.00 and will pour five glasses.
• Initial set up costs for the bar such as the marble bar; tables, equipment, wine stands, etc. were $200,000.
• The owner signed a 10 year lease. Business hours are 12:00 to 10:00 daily.

Cost Assumptions

• The bar manager earns a fixed salary of $50,000 per year.
• Two servers are required at $15.00 per hour.
• Rent is $7.50 per square foot per month in a space of 2,000 square feet.
• Insurance is $12,000 per year. Other overhead costs such as utilities, cleaning, accounting, permits, etc. are estimated at $1,000 per month.

1. Compute revenue and direct material cost (variable cost) per glass of wine. (All costs besides wine costs are assumed fixed. Initial set up costs are amortized over the life of the lease. List each annual fixed cost.)

2. What is the break-even quantity in glasses of wine? How much revenue is generated from break-even sales?

3. Prepare a cost-volume chart showing a loss, break-even point and profit.