Reference no: EM1372524
The level of fixed costs necessary to run my coffee shop on a monthly basis is $9,000. In addition, a cup of coffee sells for $1.25 costs $0.25 for the bulk coffee, filters, and water.
The contribution margin of a cup of coffee is, therefore, $1.00. I can now calculate how many cups of coffee I have to sell to cover my fixed costs:
Break-Even = (Fixed Costs) / (Contribution Margin)
= $9,000/$1.00 = 9,000 cups of coffee per month
I will also offer gourmet coffees, which cost $0.50 per cup to brew, at $2.00 per cup. I will also offer baked goods, which cost $0.30, each, at $1.30. The break-even calculation is now indeterminate, that is, there are an infinite number of solutions without making some additional assumptions.
I will assume that two-thirds of my coffee sales will be regular coffee (call the number of cups R, the remaining third, gourmet coffee, G). I will further assume that half of all coffee purchasers also buy a pastry (P):
Contribution Margin (CM) = CM for each product * Units sold
= $0.75*R + $1.50*G + $1.00*P
But G is half of R,
and P is half of R and G
combined: = $0.75*R + $1.50*(R/2) + $1.00*(R+G)/2
relating entirely to R: = $0.75*R + $0.75*R + $1.00* (R+(R/2))/2
combining and simplifying: = $1.50*R + $1.00*(3*R/4)
= $1.50*R + $0.75*R = $2.25*R
Since this must equal fixed costs at break-even: $2.25*R = $9000; R = 4000
Relating back to my assumptions, each month I must sell 4000 cups of regular coffee, 2000 cups of gourmet coffee, and 3000 pastries.
Create a break-even chart and do cost-plus pricing (price = unit cost/1 minus target rate of return) on regular coffee, gourmet coffee, and pastries combined.
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