Tom Flannery has developed a new recipe for fried chicken and plans to open a take-out restaurant in Oklahoma City. His father-in-law has agreed to invest $500,000 in the operation provided Tom can convince him that profits will be at least 20 percent of sales revenues. Tom estimated that total fixed expenses would be $24,000 per year and that variable expenses would be approximately 40 percent of sales revenue.
Required
1. How much sales revenue must be earned to produce profits equal to 20 percent of sales revenue? Prepare a contribution income statement to verify your answer.
2. If Tom plans on selling 12-piece buckets of chicken for $10 each, how many buckets must he sell to earn a profit equal to 20 percent of sales? Twenty-five percent of sales? Prepare a contribution income statement to verify the second answer.
3. Suppose Tom's father-in-law meant that the after-tax profit had to be 20 percent of sales revenue. Under this assumption, how much sales revenue must be gen- erated by Tom's chicken business? (Assume that the tax rate is 40 percent.)