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 is contemplating opening one. Linda would supervise the cooking, and Steve would leave his current job to be the maître 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 seating’s 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 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
Compute the annual breakeven number of meals and sales revenue for the restaurant.
Compute the number of meals and the amount of sales revenue needed to earn operating income of $75,600 for the year.
In addition, address the following in one to two paragraphs:
Identify and discuss several qualitative factors that should be considered in the decision process in addition to the quantitative data already computed in the case assignment.
What are the potential benefits of applying CVP analysis to business decision making?
Provide an example of another business scenario that could benefit from CVP analysis and explain how you would apply CVP analysis in the decision-making process.
1. Sales Revenue per meal= $45 (100%)
Variable Expenses per meal= $15 (33.3%)
Breakeven point for meals= fixed cost of a product/ contribution per unit
Breakeven point for sales=45 *5000
2. Sales revenue=45 (100%)
Variable Expenses= 15 (33.3%)
Using the information above, to reach the target of $75600, the contribution should equal $225,600. The number of meals required to achieve the required net income would be $225,600/30= 7520 meals.
Different qualitative factors that need to be considered in this case will include health trends in Bartlesville. Health trends may indicate whether there will be many customers seeking to eat at a Thai restaurant. Gaining a reputation in the area for being the first Thai restaurant is also a qualitative factor to consider. Having a reputation for being innovative will definitely boost business for the Homs.
The main benefit of conducting a CVP analysis is that it provides a detailed and comprehensive assessment of the performance of the company. Managers often use CVP analyses to help in decision-making such as whether to enter a certain market or not. Analysis of the company’s breakeven point can help the decision makers predict how future production and spending can impact the company’s progress.
For instance, a fashion retail company that is entering into a rural market can really use CVP analysis. The analysis will include the break-even point for sales and clothes’ item that would be required to keep the company afloat. The analysis will help the manager decide whether it will be strategic, sustainable, and profitable to enter such a market.