Assignment Question 2

CVP analysis; sales mix

Half-Time Pty Ltd currently sells hotdogs at the local cricket grounds. In a typical summer month, the stall reports a profit of $13 500 with sales of $75 000, fixed cost totalling $31 500. The variable cost of each hotdog is $0.96.

John, the proprietor, plans to start selling wedges with chilli and sour cream dipping for $7 each. The variable cost of each serve of wedges is $2.28 and a new fryer as well as another staff member to help cook the wedges will increase monthly fixed costs by $13 212. Initial sales of wedges are expected to be 7500 serves. Some of the wedges sales will come from current hotdog purchasers; thus, John expects monthly hotdogs sales (at current price) to decline to $45 000. After six months of selling wedges, John believes that hotdogs sales will start to increase again.

Required:

1. Define cost-volume-profit (CVP) analysis and describe the assumptions underlying CVP analysis. How can CVP analysis assist managers?

2. Define contribution margin, contribution margin per unit, and contribution margin percentage, break-even point. How does an increase in income tax rate affect the break-even point?

3. Determine the monthly break-even sales in units and dollars for Half-Time Pty Ltd before adding the wedges to the menu.

4. How many hot dogs and wedges does John need to sell every month in order to break even during the first six months of wedges sales, assuming a constant sales mix of 1 hotdog to every 2 serves of wedges?

5. Given John’s estimate of wedges and hotdogs sales once wedges are added to the menu, what is the estimated monthly profit assuming his estimates are realised? Should John go ahead with the plan to also sell wedges? What other factors should John consider in deciding whether to go ahead with the plan to sell wedges