Accounting

Problem 16–3.*

Mike Solid started a pizzeria in 1999. For this purpose he rented a building for $1,800 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 ex-

penses for utilities and supplies have been rather constant.

Mr. Solid increased his business between 1999 and 2001. Profits have more than dou-

bled 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:

Required:

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 $14,400 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 $60,000. 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.

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