Reference no: EM131884743

Problem

Johnny Mobile started a food truck business in 2017 by investing $100,000 of his own money in the corporation in exchange for stock. Mr. Mobile concentrates on serving Lobster Rolls and his profits have more than doubled from 2017 - 2019. Mr. Mobile does not understand why his profits have increased faster than his volume, but he believes that his focus and strategic positioning regarding high levels of customer service and product quality have helped fuel this growth in his business.

Projected sales for 2020 are $396,000 with a cost of goods sold (food costs only - Mr. Mobile only uses fresh ingredients) equal to $178,200 with the average lobster roll selling for $11.00.

Currently, Mr. Mobile owns two food trucks. One salaried person staffs each food truck full-time (annual cost per full-time food truck employee is $30,000) and six college students always work 30 hours per week helping out where needed (annual cost per helper employee is $15,000). An outside accountant prepares the taxes and bookkeeping at a cost of $900 per month. The necessary food trucks were originally purchased for cash in 2017. The annual depreciation expense for each food truck is $7,500. Propane and gas have typically run $7,165 annually. Mr. Mobile has noticed that annual expenses for accounting, depreciation, and propane/gas have been rather constant regardless of the sales level.

Briefly explain to Mr. Mobile why his profits have increased at a faster rate than his sales - please calculate the metric for measuring risk in your explanation.