Question

Rio Coffee Shoppe sells two coffee drinks—a regular coffee and a latte. The two drinks have the following prices and cost characteristics:

Regular Coffee Latte
Sales price (per cup) $1.80 $2.30
Variable costs (per cup) 0.70 1.10

The monthly fixed costs at Rio are $7,458. Based on experience, the manager at Rio knows that the store sells 70 percent regular coffee and 30 percent lattes.

Required:
a. How many cups of regular coffee must Rio sell every month to break even?
b. How many cups of lattes must Rio sell every month to break even?

Answer 1

a. $4,620

b. $1,980

Explanation:

The computation of cups of regular coffee must Rio sell every month to break even is shown below:-

Particulars Regular Coffee Latte

Sales price $1.80 $2.30

Variable costs $0.70 $1.10

Contribution

margin $1.1 $1.2

Contribution margin per mix = ($1.1 × 70%) + ($1.2 × 30%)

= $0.77 + 0.36

= $1.13

Breakeven point sales mix = Fixed cost ÷ Contribution margin

= $7,458 ÷ $1.13

= $6,600

cups of regular coffee required for breakeven = Breakeven at sales mix × Percentage of regular coffee sale

= $6,600 × 70%

= $4,620

b. The computation of cups of lattes required to breakeven is shown below:-

Cups of latte required for breakeven = Breakeven at sales mix × Percentage of latte

= $6,600 × 30%

= $1,980