Sweetgreen, launched by entrepreneurs Nic Jammet, Jon Neman, and Nate Ru, is a fast-casual restaurant brand devoted to healthy salad choices. The company also sells T-shirts, hats, and other apparel.
1. Identify at least two fixed costs that will not change regardless of how much salad Sweetgreen sells.
2. Sweetgreen is expanding. How could overly optimistic sales estimates potentially hurt its business?
3. Explain how cost-volume-profit analysis can help Nic, Jon, and Nate manage Sweetgreen.
Two fixed costs include salary expenses and license fees.
Overly optimistic sales will increase the cost of the business entity.
It will help the business entity to identify the effect of the cost incurred by the business and identify the cost that is needed to be controlled.
Break-even units are the level of sales units at which the business is in a situation of no profit or loss.
Two fixed costs that will not get affected due to the volume of sales are:
Salaries expenses: The salaries paid to waiters and cooks.
Any license fees paid for opening the restaurant.
Overly optimistic sales will increase the cost of expenses such as payroll expenses, and the business entity will have a higher amount of ending inventory left with them, which will negatively affect the business entity.
The business entity will be able to identify the effect of the variable and fixed costs on the business’s profit.
The business will get information regarding the number of sales needed to cover all the costs incurred.
It will help management avoid the cost that is not necessary to incur.
Company A is a manufacturer with current sales of $6,000,000 and a 60% contribution margin. Its fixed costs equal $2,600,000. Company B is a consulting firm with current service revenues of $4,500,000 and a 25% contribution margin. Its fixed costs equal $375,000. Compute the degree of operating leverage (DOL) for each company. Identify which company benefits more from a 20% increase in sales and explain why?
R&R Tax Service offers tax and consulting services to individuals and small businesses. Data for fees and costs of three types of tax returns follow. R&R provides services in the ratio of 5:3:2 (easy, moderate, business). Fixed costs total $18,000 for the tax season. Use this information to determine the (1) selling price per composite unit, (2) variable costs per composite unit, (3) break-even point in composite units, and (4) number of units of each product that will be sold at the break-even point.
Types of return
Variable cost per return
Easy (Form 1040EZ)
Moderate (Form 1040)
Aces Inc., a manufacturer of tennis rackets, began operations this year. The company produced 6,000 rackets and sold 4,900. Each racket was sold at a price of $90. Fixed overhead costs are $78,000, and fixed selling and administrative costs are $65,200. The company also reports the following per unit costs for the year. Prepare an income statement under absorption costing.
Variable production cost
Variable selling and administrative expenses
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