Question: Multiproduct break-even analysis is often viewed differently when actually applied in practice. You are to visit a local fast-food restaurant and count the number of items on the menu. To apply multiproduct break-even analysis to the restaurant, similar menu items must often be fit into groups. A reasonable approach is to classify menu items into approximately five groups. We then estimate average selling price and average variable cost to compute average contribution margin. For fast-food restaurants, the highest contribution margin is with its beverages, at about 90%.
Required: 1. Prepare a one-year multiproduct break-even analysis for the restaurant you visit. Begin by establishing groups. Next, estimate each group's volume and contribution margin. These estimates are necessary to compute each group's contribution margin. Assume that annual fixed costs in total are $500,000 per year.
2. Prepare a one-page report on the results of your analysis. Comment on the volume of sales necessary to break even at a fast-food restaurant.