Question - You and your business partner plan to open a gourmet burger restaurant. Your partner estimated the new business will sell a hundred fifty thousand burgers during its first year and a half of operations. You want to determine the number of burgers you must sell to break even during this period. Here are the figures you know so far:
1. The variable cost for each burger is $0.90 each
2. The fixed cost of making burgers for eighteen months is $130,000 (this includes costs such as rent, utilities, insurance)
3. You sell your burgers for $1.89 each
4. At the $1.89 per unit selling price, how many burgers will you have to sell to break even?
Part I: Using the previous information, calculate the break-even number of burgers. How close is the break-even number of burgers to your partner's sales estimate of one hundred fifty thousand burgers? How confident are you that your restaurant will be profitable?
Part II: Now, calculate the break-even number of burgers using a higher selling price. Pretend that your likely customers are burger fanatics and will pay $2.79 a burger rather than $1.89. Also pretend that the variable cost for each burger and your fixed costs won't change (variable cost per burger is still $ 0.90 and fixed costs are still $130,000). Calculate the number of burgers you must sell to break even at this higher selling price. Are you now more confident that the business will succeed?
Part III: Calculate the break-even points and answer these two questions:
1. If the variable cost for each burger went down from $0.90 to $0.80 per burger (and your selling price stayed at $1.89) would you need to sell more or fewer burgers to break even?
2. If fixed costs went down from $130,000 to $100,000 (and your selling price stayed at $1.89 and variable cost were $0.90), would you need to sell more or fewer burgers to break even?
SHOW ALL OF YOUR CALCULATIONS FOR EACH SECTION OF THIS DISCUSSION.