Chapter 7, Problem 7.29AE

Calculate contribution margin and breakeven (Learning Objectives 1, 2 & 5)

The Ohio State Fair is one of the largest state fairs in the United States. It draws nearly one million visitors over the twelve-day period each July and August. The fair is a nonprofit organization. It is self-supporting and needs, at a minimum, to break even by generating revenues through various activities.

Among the sources of revenue for The Ohio State Fair are the revenues generated from the food vendors. A number of food vendors offer a wide variety of fair foods to attendees, including funnel cakes, gyros, cotton candy, milkshakes, and corn dogs.

Assume the following schedule of fees for food vendors at the Ohio State Fair:

• $10 per linear foot for ground service fees (front footage x depth)
• 15% of concessions (food sales)
• $50 per 12-day parking permit
• $290 for 100-amp electrical service
• $50 per 12-day fair admittance pass (one is included with basic rental agreement)

Star Concessions is a vendor at the fair. It has a food booth that requires 15 feet of front frontage and is 12 feet deep. Star Concessions expects to have sales averaging $4,000 per day for each of the 12 days of the fair. It has a total of four employees who will work the fair throughout the entire 12-day period. Star Concessions pays for each employee’s fair admission and parking. Assume that the employee wages for the 12-day period are expected to total $9,560.

Requirements

1. 1. Of the fees listed in the schedule, which fees are variable with respect to the number of customers at the booth? Which fees are fixed?
2. 2. What is the projected total fee that Star Concessions will need to pay to The Ohio State Fair assuming it meets its expected sales level for each of the 12 days of the fair?
3. 3. Assume that variable costs are 60% of sales revenue. (This 60% includes the 15% concession fee charged by The Ohio State Fair.) How much in total sales revenue is needed for Star Concessions to break even?
4. 4. Calculate Star Concessions’ margin of safety both in dollars and percentage.