You just inherited a million dollars from your grandfather. You always had a tal

Question

You just inherited a million dollars from your grandfather. You always had a talent for cooking and have long dreamed of opening an expensive gourmet restaurant. You are happy living near your college’s campus and would like to open a four-star restaurant across the street from school.

Of course, the restaurant would have certain fixed costs; for example, management salaries, utilities, interest, license fees, and property taxes. The only variable costs would be the food, beverages, and preparation costs. The fixed costs are estimated at $440,000 per year while the average variable cost per meal is estimated at $15. These meals would be sold for an average of $27 each.

1. Perform a break-even analysis of your proposed business. How many units will you have to sell to break even?

2. How many units will you have to sell each evening (use a 365-day year) to break even?

3. How much profit will the restaurant earn on sales of 40,000 meals?

Explanation / Answer

1)BEP(units) =Fixed cost /(price -Variable cost)

                      = 440000 / (27 -15)

                     = 440000 / 12

                      = 36666.67 units   (approx 36667)

2) Units to sell every evening = 36667 /365 = 100 meals approx

3) Profit = 40000(27-15) - 440000

                 = 40000*12 - 440000

              = 480000-440000

                 = $ 40000

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