Situation:

To earn some money while attending college, you decide to operate a hot dog stand business. The manager of a local shopping center will let you use a small outdoor covered space for $550 per month, which includes the cost of electricity. You can buy a portable hot dog vending stand that will last you 2 years for $240. You decide to buy the equipment to heat the hot dogs. Assume that you have calculated depreciation on this equipment at $10 per month.

The average cost per hot dog, including the bun and condiments is 65 cents. You sell each hot dog for $3.00. Your business is open for a couple of hours around noon and a few more hours during the late afternoon to early evening hours each week day and on Saturdays. You decide not to hire any employees because paying them will cut into your profits. The business is open an average of 24 days per month and you sell an average of 120 hot dogs per day.

Questions:

Prepare a condensed contribution income statement that shows your monthly net operating income based on the information above. This statement should be five lines long. The first line is for sales; the second line is for variable expenses; the third line is for contribution margin; the fourth line is for fixed expenses; and the fifth line is for net operating income.

How many hot dogs do you need to sell each month to break even?

Prepare a condensed contribution income statement to prove your break-even point.

Calculate in dollars and as a percentage of sales.

In an effort to improve your income, you consider raising the price to $3.50 per hot dog. As a result, you assume that sales volume will drop by about 20 hot dogs per day.

A.Prepare a condensed contribution income statement that shows this income.

B.What is the new break-even point in units (hot dogs)?

C.Use the CM ratio to calculate the break-even point in sales dollars.

A different approach to improve your income is to decrease the price to $2.75 per hot dog. You hope sales volume will increase by 20% above the 120 hot dogs per day.

A.Prepare a condensed contribution income statement for this possibility.

B.What is the new break-even point in units?

C.Use the CM ratio to calculate the break-even point in sales dollars.

Another possibility is to try to increase your sales by doing some advertising. You could put up a sign by the road if you can get permission. You could also put an advertisement in the local paper. Assume that you do advertise for a cost of $60 per month and keep the price at $3.00 per hot dog. Assume that sales volume increases to 145 hot dogs per day.

A.Prepare a condensed contribution income statement for this possibility.

B.What is the new break-even point in units?

C.Use the CM ratio to calculate the break-even point in sales dollars.

A fourth possibility is that you add another product, such as nacho chips. Assume that you continue to charge $3.00 for hot dogs and now you sell nacho chips for $1.50 per container. The hot dogs still cost you 65 cents each and the nacho chips cost you 55 cents per container. Assume that your fixed costs remain the same except that you will have an additional $10 of depreciation per month on equipment that you will have to buy to heat and dispense the cheese sauce for the nachos. (Assume that there are no advertising expenses.) Suppose you sell 120 hot dogs per day and 60 containers of nacho chips. You now have multiple products.

A.Prepare a condensed contribution income statement for this level of sales.

B.What is your break-even point in sales dollars?

C.If you were really opening a hot dog stand business, what actions would you take to help it become as profitable as possible? Think about what actions you would take to increase sales revenue, reduce variable expenses and reduce fixed expenses. Write at least one paragraph explaining what you would do to make your business more profitable. Note: Do not talk about your calculations in the previous requirements; these calculations are based on assumptions.