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 maite d'. The restauant would serve dinner Tuesday through Saturday.
Steve has noticed a restaurant for lease. The restaurant has seven table, 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 dishwashers salaries $61,200 per year.
Rent (premises, equipment) $4,000 per month.
Cleaning (linen and premises) $800 per month
Replacement of dishes cutlery and glasses $300 per month.
Utilities advertising telephone $2,300 per month.

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

2Also compute the number of meals and the amount of sales revenue needed to earn operating income of $75,600 for the year.

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

4. Should they open the resturant?

Explanation / Answer

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

Contribution = $45 - $15 = $30
Fixed costs = $61,200 + $48,000 + $9,600 + $3,600 + $27,600 = $150,000 per year
breakeven number of meals = $150,000 / $30 = 5,000 meals
Sales revenue = 5,000 meals @$45 = $225,000

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

Number of meals = $150,000 + $75,600 / $30 = 7,520 meals
Sales revenue = 7,520 meals @$45 = $338,400

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

   No. of meals per night = (7,520 / 50) / 5days per week = 30 meals per night

4. Should they open the restaurant?  

Linda plans 2 seating per evening i.e. total 28 meals per evening which is less than 30 meals per evening in order to earn target income of $75,600 as such if they stick on minimum target income of $75,600, they should not open the restaurant.

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