Case 1. Steve and Linda Hom live in Bartlesville, Oklahoma. Two years ago, they visited Thailand. Linda, a professional chef, was impressed with the cooking methods and the spices used in the Thai food. Bartlesville does not have a Thai restaurant, and the Homs are contemplating opening one. Linda would supervise the cooking, and Steve would leave his current job to be the maitre d’. The restaurant would serve dinner Tuesday through Saturday.
Steve has noticed a restaurant for lease. The restaurant has seven tables, each of which can seat four. Tables can be moved together for a large party. Linda is planning two seatings per evening, and the restaurant will be open 50 weeks per year.
The Homs have drawn up the following estimates Averager revenue including beverages and dessert $45 per meal;
Average cost of food $15 per meal;
Chef's and Dishwashers salaries per year $61,200; Rent 4,000 per month; Cleaning Linen and premises $800 per month; prlpacement of dishes curlery, glasses $300 per month;Utilites advertising, and telephone $2,300 per month
Requirements
Compute the annual breakeven number of meals and sales revenue for the restaurant. Also compute the number of meals and the amount of sales revenue needed to earn operating income of $75,600 for the year. How many meals must the Homs serve each night to earn their target income of $75,600? Should the couple open the restaurant?
To compute the annual breakeven number of meals and sales revenue for the restaurant, we need to consider the fixed costs and variable costs.
Fixed costs in this case include:
- Chef's and Dishwashers salaries per year: $61,200
- Rent: $4,000 per month, so $4,000 * 12 = $48,000 per year
- Cleaning Linen and premises: $800 per month, so $800 * 12 = $9,600 per year
- Replacement of dishes, cutlery, glasses: $300 per month, so $300 * 12 = $3,600 per year
- Utilities, advertising, and telephone: $2,300 per month, so $2,300 * 12 = $27,600 per year
The total fixed costs can be calculated by adding up all the above costs:
$61,200 + $48,000 + $9,600 + $3,600 + $27,600 = $149,000 per year
Variable costs include the cost of food per meal, which is $15.
The contribution margin per meal can be calculated by subtracting the cost of food per meal from the average revenue per meal:
$45 - $15 = $30
To find the breakeven number of meals, we divide the fixed costs by the contribution margin per meal:
$149,000 / $30 = 4,967 meals
So the annual breakeven number of meals for the restaurant is 4,967.
To compute the breakeven sales revenue, we multiply the breakeven number of meals by the average revenue per meal:
4,967 meals * $45 = $223,515
Therefore, the annual breakeven sales revenue for the restaurant is $223,515.
To earn an operating income of $75,600 for the year, we need to consider the target income in addition to the fixed costs.
Total costs (including fixed costs and variable costs) can be calculated by multiplying the number of meals by the variable cost per meal ($15) and adding the fixed costs:
Total costs = (Number of meals * Variable cost per meal) + Fixed costs
To find the number of meals needed to earn the target income, we plug in the values into the formula:
(Number of meals * $15) + $149,000 = $75,600
Solving for the number of meals:
(Number of meals * $15) = $75,600 - $149,000
(Number of meals * $15) = -$73,400
Number of meals = -$73,400 / $15
Number of meals = 4,893
Therefore, the Homs must serve 4,893 meals to earn their target income of $75,600.
Based on the calculations, it appears that the Homs should consider opening the restaurant as the annual breakeven number of meals is less than the target income of $75,600. However, they should also consider other factors such as market demand, competition, and feasibility studies to make an informed decision.