Greg Morrison recently graduated from mortuary school. He is considering opening his own funeral home. A funeral home is a high-fixed cost business, as it requires considerable expenditures for facilities, labor, and equipment, no matter how many families are served. Assume the annual fixed cost of operations is $800,000. Further assume that the only significant variable cost relates to burial containers like urns and caskets. An average casket costs $1,200. Greg's banker has asked a variety of questions in contemplation of providing a loan for this business.

a. If the average family is charged $6,000 for services and a burial container, how many families must be served to clear the break-even point?
b. If the banker believes greg will only serve 100 families during the first year in business, how much will the business lose during its first year of operation?
c. If Greg beleives his profits will be at least $100,000 during the first year, how much is he anticipating for total revenue?
d. The banker has suggested that Greg can reduce his fixed costs by $150,000 if he will not buy any vehicles. greg can instead rent vehicles as needed. The variable cost of renting is $700 per family served. Will this suggestion help greg reach the break-even point sooner?

a. We have the Selling price of $6,000 and the fixed cost of $800,000 and a variable cost of $1,200. We simply calculate the break even point in units by dividing the fixed cost by the contribution per unit.

800000 / (6000-1200) = 166.67 rounded off to 167 families.

b. To calculate the loss, we simply calculate the revenue and cost that will be earned and incurred at 100 families respectively.

Revenue = 6000 * 100 => $600,000
Variable Cost = 1200 * 100 => $120,000
Fixed cost = $800,000
Loss = 600000 - (800000 + 120000) = $320,000

c. To calculate revenue to earn a certain target profit, we divide the Fixed cost + Target profit with the Contribution to sales ratio.

Contribution to sales ratio = 4800 / 6000 = 0.8
Target Profit sales = (800000 + 100000) / 0.8 => 1,125,000
A revenue of at least 1125000 is required to earn at least 100000 profit.

d. We calculate the new break even point in units.

New contribution per unit = 6000 - 1200 - 700 = 4100
New Fixed cost = 800000 - 150000 = 650000

New break even = 650000 / 4100 = 158.53 rounded off to 159 families.
So the suggestion will help reach break even earlier.