Question

7. Mr Y has developed a new technique for BEST BURGER and plans to open a take-out restaurant. His brother has agreed to invest Birr 500,000 in the operation provided Mr Y can convince him that profits will be at least 20 percent of sales revenues. Mr Y estimated that total fixed expenses would be Birr 24,000 per year and that variable expenses would be approximately 40 percent of sales revenue. Required
a. 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.
b. If Mr Y plans on selling 12-piece buckets of chicken for Birr 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.
c. Suppose Mr Y’s brother meant that the after-tax profit had to be 20 percent of sales revenue. Under this assumption, how much sales revenue must be generated by Y’s chicken business? (Assume that the tax rate is 40 percent.)

Answer 1

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