An owner invested $180,000 in a new family-style restaurant, of which $160,000 w

Question

An owner invested $180,000 in a new family-style restaurant, of which $160,000 was immediately used to purchase equipment and $20,000 was retained for working cash. Estimates for the first year of business are as follows:

-Menu selling prices to be established to give a markup of 150 percent over cost of food sold

-Variable wages, 28 percent of revenue

-Fixed wages, $51,600 Other variable costs, 7 percent of revenue

-Rent, $36,000

-Insurance, $4,800

-Depreciation on equipment, 20 percent

-Return on investment desired, 12 percent

-Income tax rate, 30 percent.

The restaurant has 60 seats and is open 5 days a week for lunch and dinner only. Lunch revenue is expected to be 40 percent of total volume with 2 seat turnovers. Dinner revenue will be 60 percent of total volume, with 1.25 turnovers. Calculate the average check per meal period that will cover all costs, including desired return on investment.

Explanation / Answer

Let total cost is x

Total revenue = 150/100x

Variable wages= 28% (150/100x)

Other Variable cost = 7%(150/100x)

Depriciation = 20% of 160000 = 32000$

Required Return = 12%

After Tax return = 12% minus 30% = 8.4%

Net Return required = 180000*8.4% = 15120$

So, equation is as follows:-

Total Revenue = Total Costs + Required return

150/100x = 28%(150/100x) + 51600 + 7%(150/100x) + 36000+ 4800+ 32000+ 15120

x= 143097$

So desired revenue is $143097 for first year

Total meals

Total seats= 60

Total meals available during a week = 60*5 = 300 lunch and 300 dinners

Average Customer attendance = 40% of 300 = 120 lunch + (5*2) = 130 meals

= 60% of 300 = 180 dinners + (5*1.25) = 186.25 meals

Average meals during a week = 130+186.25= 316.25 meals/ week

Total meals for a year(assuming 52 weeks) = 316.25*52 = 16445 meals

Average meal price = 143097/16445

= $ 8.70

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