Problem:
Mike Solid started a pizzeria in 1999. For this purpose he rented a building for $1,800 per month. Two persons were hired to work full time at the restaurant and six college students were hired at work 30 hours per week delivering pizza. An outside accountant was hired for tax and bookkeeping purposes at a cost of $900 per month. The necessary restaurant equipment and delivery cars were purchased with cash. Mr. Solid has noticed that expenses for utilities and supplies have been rather constant.
Mr. Solid increased his business between 1999 and 2001. Profits have more than doubled since 1999. Mr. Solid does not understand why his profits have increased faster than his volume.
A projected income statement for 2002 has been prepared by the accountant and is shown below:
Projected Income Statement
For the year ended December 31, 2002
Sales $308,000
Cost of food sold $92,400
Wages & fringe benefits of restaurant help 26,650
Wages and fringe benefits of delivery persons 54,100
Rent 15,500
Accounting services 10,900
Depreciation of delivery equipment 16,000
Depreciation of restaurant equipment 8,000
Utilities 7,165
Supplies (soap, floor wax, etc) 10,645 241,360
Income before taxes 66,640
Income taxes 19,992
Net income $46,648
Note: The average pizza sells for $8.50. Assume Mr. Solid pays out 30 percent of his income in income taxes.
Required:
Q1. What is the break even point in number of pizzas that must be sold?
Q2. What is the cash flow break even point in number of pizzas that must be sold?
Q3. If Mr. Solid withdraws $14,400 for personal use, how much cash will be left from the 2002 income producing activities?
Q4. Mr. Solid would like an after tax net income of $60,000. What volume must be reached in number of pizzas in order to obtain the desired income?
Q5. Briefly explain to Mr. Solid why his profits have increased at a faster rate than his sales.
Q6. Briefly explain to Mr. Solid why his cash flow for 2002 will exceed his profits.