https://accountingintheheadlines.com/2016/01/12/how-would-the-breakeven-sales-of

Question

https://accountingintheheadlines.com/2016/01/12/how-would-the-breakeven-sales-of-cafe-edison-a-new-york-city-diner-have-been-affected-by-a-rent-increase/

Recently, several traditional New York City diners have closed, including Cafe Edison, La Parisienne, and Three Star. Real estate costs in New York City continue to increase, thus fueling rent hikes for small businesses like the Cafe Edison. The diner closures have been attributed to both rent hikes and a decline in the number of customers.   Let’s look at a hypothetical example using Cafe Edison. Cafe Edison served a variety of traditional diner foods, including American, Polish, and European. It was located in an ornate former ballroom of the Edison Hotel in Midtown New York City, where it had operated for 34 years. It opened every day of the year between 5 – 8 am; it closed between 1 – 4 am, staying open an average of 21 hours per day. Now assume that the average selling price of a menu item at Cafe Edison was $20.00 and that Cafe Edison’s cost of that item was $16.00. Also assume that before a rent increase of $18,000 per year, Cafe Edison’s fixed costs per month totaled $30,000.

Questions

1. How much, on average, did Cafe Edison make on a menu item?

2. How many menu items would Cafe Edison need to sell per month to cover its fixed costs before the rent increase? Per day (assume 30 days per month)? Per hour?

3. How many menu items would Cafe Edison need to sell per month to cover the rent increase itself? Per day (assume 30 days per month)? Per hour?

4. Would it have been realistic for Cafe Edison to continue operating once the rent increase took effect?

Explanation / Answer

Café Edison Details Amt $ Unit Selling Price per Menu                            20 Unit variable cost per menu item                              16 Unit Cintribution Margin per menu item =                               4        1 Café Edison made an average contribution of $4 per menu item.        2 Before rent Increase: Total Fixed cost per month                    30,000 Unit Cintribution Margin per menu item =                               4 Break Even no of menu items per month=                      7,500 nos Break Even no of menu items per day=7500/30=                      250.0 nos Break Even no of menu items per hour=250/21=                            12 nos        3 Rent Increase =$18000 per year =$1500 per month Rent to be covered per month =                      1,500 Unit Cintribution Margin per menu item =                               4 Menu items to be sold per month to cover rent increase =1500/4=                      375.0 nos Menu items to be sold per day to cover rent increase =375/30=                         12.5 nos Menu items to be sold per Hour to cover rent increase =13/21=                         0.62 nos        4 A the rent increase calls foir selling 13   additional menu item per day or less than   one additional menu item per hour, it would have been realistic to continue operation   for Café Edison.

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