Question

A kitchen receives $8 per meal delivered from a foundation (i.e., the marginal revenue of $8 per meal delivered). It has to spend $6 variable costs per meal (i.e., marginal expense of $6 per meal) and has $300,000 annual fixed costs. If it receives $180,000 from various individual donors, how many meals should it serve to reach the break-even point?

Answer 1

The kitchen must serve 60,000 meals to reach the break-even point, covering the remaining fixed costs with the contribution margin earned per meal.

Step-by-step explanation:

To determine the number of meals the kitchen needs to serve to reach the break-even point, we first calculate the total fixed costs and subtract any donations.

The total annual fixed costs are $300,000 and the kitchen receives $180,000 in donations. Thus, the kitchen needs to cover $300,000 - $180,000 = $120,000 of fixed costs with the revenue from meals delivered.

Each meal generates a marginal revenue of $8 and incurs a marginal cost of $6. This leaves a contribution margin of $8 - $6 = $2 per meal. To cover the remaining fixed costs of $120,000 with a contribution margin of $2 per meal, the kitchen must serve $120,000 / $2 = 60,000 meals to break even.