Mike Solid started a pizzeria in 1999. For this purpose he rented a building for $1800 per month. Two persons were hired to work full-time at the restaurant and six college students were hired to work 30 hours per week delivering pizza. An outside accountant was hired for tax and bookkeeping purposes at a cost of $900 per month. The necessary restaurant equipment and delivery cars were purchased with cash. Mr. solid has noticed that expenses for utilities and supplies have been rather constant.
Mr. Solid increased his business between 1999 and 2001. Profits have more than doubled since 1999. Mr. Solid does not understand why his profits have increased faster than his volume.
A projected income statement for 2002 has been prepared by the accountant and is shown below:
Projected Income Statement
For the Year Ended December 31, 2002
Cost of food sold $92400
Wages & Fringe benefits of restaurant help 26650
Wages & fringe benefits of delivery persons 54100
Accounting Service 10900
Depreciation of delivery equipment 16000
Depreciation of restaurant equipment 8000
Supplies ( soap, floor wax, etc.) 10645 241360
Income Before taxes 66640
Income taxes 19992
Net Income $46648
Note: The average pizza sells for $8.50. Assume that Mr. Solid pays out 30 percent of his income in taxes.
A. What is the break-even point in number of pizzas that must be sold?
B. What is the cash flow break-even point in number of pizzas that must be sold?
C. If Mr. Solid withdraws $14400 for personal use, how much cash will be left from the 2002 income-producing activities?
D. Mr. Solid would like an after-tax net income of $60000. What volume must be reached in number of pizzas in order to obtain the desired income?
E. Briefly explain to Mr. Solid why his profits have increased at a faster rate than his sales.
F. Briefly explain to Mr. Solid why his cash flow for 2002 will exceed his profits.