Steve and Linda Hom live in Bartlesville, Oklahoma. Two years ago, they visited

Question

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-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;
Average revenue, including beverages and dessert........$45 per meal
Average cost of food...........................................$15 per meal
Chef's and dishwasher's salaries...............................$61,200 per year
Rent (premises, equipment)...................................$4,000 per month
Cleaning (linen and premises).................................$800 per month
Replacement of dishes, cutlery, glasses......................$300 per month
Utilities, advertising, telephone..............................$2,300 per month
Requirements:
1. Compute the annual breakeven number of meals and sales revenue for the restaurant.
2. Also compute the number of meals and the amount of sales revenue needed to earn operating income of $75,600 for the year.
3. Home many meals must the Homs serve each night to earn their target income of $75,600?
4. Should the couple open the restaurant?

Explanation / Answer

Sales Revenue 45 (100%) Variable Expenses 15 (33.3%) CM 30 (66.6%) Fixed Expenses $150,000 NI 1. Where x is the amount of meals served. 45x = 15x + 61,200 + 4,000*12 + 800*12 + 300*12 + 2,300*12 30x = 150,000 x = 5,000 meals The sales revenue would be 45*5000 = $225,00. 2. If you wanted to earn an operating income of $75,600 per year: Sales Revenue 45 (100%) Variable Expenses (15) (33.3%) CM 30 (66.6%) Fixed Expenses (150,000) NI $75,600 Then, you would want the contribution to equal $225,600. Or: 30x = 225,600 x = 7,520 meals 3. Currently, they sell meals Tues-Sat, has 7 tables that seat 4 with 2 seatings per evening and will be open 50 weeks a year. That is 250 days a year that they are operating. However, if they are planning to break even, they would need to sell 2,520 more meals. This information is kind of confusing in the wording of the problem because we do not know how many meals they actually plan on making. 4. Without knowing exactly what is being asked for in 3, you cannot make any answer for 4. However, if it is feasible for them to break even or make target income, then it is definitely a sign that they should open the restaurant.

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