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 in a town of 50,000 residents 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. From a Mathematical standpoint, how many units will you have to sell each year to break even? (Round to the nearest hundredths).

2.   From a business operations standpoint, how many units will you have to sell each year to break even?

3.   Operationally, how many units will you have to sell each evening (use a 365-day year) to break even?

4.   Considering your community whose population is 75,000 residents, does it seem likely that there is a large enough market for gourmet food for the restaurant to operate at or beyond the break-even point? Why or Why not?

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

Explanation / Answer

1. Contribution margin per meal = Unit selling price - Unit variable cost = $ 27 - $ 15 = $ 12.

Break-even number of meals = Total Fixed Costs / Unit Contribution Margin = $ 440,000 / $ 12 = 36,700 meals per annum.

3. Number of meals to be sold each evening to break-even = 36,700 / 365 = 101 units.

4. Yes. Since the annual break-even is only 36,700 meals per year, less than 50% of the population would need to have a meal each year for the restaurant to be able to break even.

5. On sales of 40,000 meals, profit = 40,000 x $ 12 - $ 440,000 = $ 40,000.

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