The following information pertains to Quality Food Service for the first two quarters of a year.

Quality Food Service
	First Quarter	Second Quarter
Sales at $4.80 per meal	$36,000	$63,000
Total costs	62,000	80,000
Income (loss)	($26,000)	($17,000)

Each dollar of variable costs comprises of 50 percent direct labor, 25 percent direct materials, and 25 percent variable overhead costs. The company’s fixed costs are $38,000 each quarter. Quality expects price per unit, variable cost per unit, and total fixed costs to remain at the same level in the third quarter as during the first two quarters. Quality also expects the sales level in the third quarter to be the same as in the second quarter.

Required

(4 points) What is the break-even point in meals (units) in a quarter?

(4 points) The company has a new opportunity to supply special meals to a government agency that runs a facility for senior citizens. It expects that for every four meals it sells to its regular (i.e., existing) customer base at $4.80 per meal, it can sell two meals to government agencies at $4.30 per meal. The company expects that this sales mix will remain steady. The unit variable cost will be the same for both types of meals. However, if the company makes both types of meals, direct labor costs per meal will increase by 15 percent for all meals, and the fixed costs will increase by $3,000 per quarter. How many total meals will the company have to make and sell in a quarter in order to break-even in this case? How many of these meals will represent sales to regular customers? In your opinion, will the company lose or benefit from adding this new line of business?

(3 points) This part is unrelated the parts 1-3 above. When conducting CVP analysis, we often look at Operating Leverage.  Using the Operating Leverage formula: Operating Income/Contribution Margin, how would you interpret a product (A) with an Operating Leverage of 4.5 versus a product (B) with an Operating Leverage of 2.2? Explain how profit would change as sales increase or decrease.