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:

Requirements

R1. Compute the annual breakeven number of meals and sales revenue for the restaurant.

R2. Also compute the number of meals and the amount of sales revenue needed to earn operating income of $75,600 for the year.

R3. How many meals must the Homs serve each night to earn their target income of $75,600?

R4. Should the couple open the restaurant?

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

Explanation / Answer

PART 1

Break even number of meals = Fixed cost / Contribution Margin per unit

Fixed costs

Chef's and dishwashers salaries - 61,200 per year

Rent (premises, equipment) $4,000 per month*12 - 48,000 per year

Cleaning (linen and premises) $800 per month*12 - 9,600 per year

Replacement of dishes cutlery and glasses $300 per month*12 - 3,600 per year

Utilities advertising telephone $2,300 per month*12 - 27,600 per year

Total fixed costs - 150,000

Contribution Margin per unit = Average Revenue, Including Beverages and Dessert-Average Cost of Food = 45-15 = 30

Break even number of meals = 150,000 / 30 = 5000

PART 2

Number of meals = (Targeted Profit + Fixed Cost) / Contribution Margin per unit = (75,600 + 150,000) / 30 = 7,520 meals

Amount of sales revenue = Number of meals*Average revenue = 7520*45 = 338400

PART 3

Meals serve each night = Annual meals / number of nights = 7520/(50*5) = 30

PART 4

the couple should open the restaurant as it high contribution margin ration of 66.67%

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