Q1DC - Horngren'S Financial And Managerial Accounting

Question

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 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 maître d’. The restaurant would serve dinner Tuesday through 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 on using each table twice each evening, and the restaurant will be open 50 weeks per year. The Homs have drawn up the following estimates: 

Average revenue, including beverages and desserts \( 45 per meal Average cost of food 15 per meal Chef’s and dishwasher’s salaries 5,100 per month Rent (premises, equipment) 4,000 per month Cleaning (linen, premises) 800 per month Replacement of dishes, cutlery, glasses 300 per month Utilities, advertising, telephone 2,300 per month

Requirements 

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

2. 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 profit of $75,600?

 4. What factors should the Homs consider before they make their decision as to whether to open the restaurant?

 

Step-by-Step Solution

Answer

Answer

 

1. The annual break-even point is 5000 units and $225,000
2. The number of meals is 7520, and sales revenue is $338,400
3. The number of meals serves each night is 30
4. Factors that are to be considered are an excellent location, license etc.

 

Step 1: Meaning of Break-even point

 

Break-even is a situation with no profit or loss situation of a business in which the contribution margin equals the fixed cost.

Step 2: Computation of annual breakeven number of meals and sales revenue

$$\begin{gathered} Calculation of annual breakeven point \\ \text{Annual} \text{breakeven} \text{units = } \frac{Annual fixed cost+Target profit}{Contribution margin per unit} \\ =\frac{\$\left(5100+4000+800+300+2300\right)\times 12+\$0}{\$\left(45-15\right)} \\ =\frac{\$12,500\times 12}{\$30} \\ = 5000 Units \\ \text{Calculation of annual breakeven sales revenue } \end{gathered}$$

$$\begin{gathered} \text{Annual brak even Sales revenue =Break evenunit×Perunit Selling price} \\ \text{ = 5,000}\times \text{\$ 45} \\ \text{ = \$ 225,000} \end{gathered}$$

Step 3: Required unit of sales unit to make profit of $756,000

$$\begin{gathered} \text{Required} \text{units}= \frac{\text{Annual} \text{fixed} \text{cost} \text{ + Target} \text{profit}}{\text{Contribution} \text{margin} \text{per} \text{unit}} \\ =\frac{\left(\$12,500\times 12\right) + \$75,600}{\$45-\$15} \\ =\frac{\$150,000 + \$75,600}{\$30} \\ = 7,520 \text{Units} \\ Calculation of sales revenue \end{gathered}$$

Step 4: Calculation of meals to serve each night to earn profit of $75,600

$$\begin{gathered} \text{Total no,of days restuarent open =No,of days open in week×Open week in a year} \\ \text{ =5×50} \\ \text{250 days} \\ \text{Calculation of the meals serves each night } \\ \text{Meals} \text{Must} \text{Serve} \text{Each} \text{Night = }\frac{\text{Required} \text{selling} \text{units} \text{for} \text{the} \text{year}}{\text{Total} \text{open} \text{days in} \text{the year}} \\ = \frac{7520}{250} \\ =30 \text{meals} \end{gathered}$$

Step 5: Factors to be considered

These factors should the Homs consider before they make their decision as to whether to open the restaurant;

a)   Initial Capital investment.

b)   A good location for the restaurant.

c)   Purchasing capability of people.

d)   License for the running restaurant.