# What are the potential benefits of applying CVP analysis to business decision making?

On his own

Andrew worked as a chef in medium-sized restaurants until he decided to persue his interest in health food and went to work with an obesity clinic. That was five years ago and Andrew is now ready to start his own restaurant for people at risk for obesity or just those who want to watch their calories. Though health food can fetch higher prices, Andrew has decided to keep his rates reasonable considering the socioeconomic profile of obesity sufferers and the location of his restaurant.

Andrew plans to serve only the main meals. His restaurant can seat 15 customers at a time. Both lunch and dinner will be available for two hours and a diner is expected to occupy a seat for about 1 hour. The restaurant will be open Monday through Friday of each week throughout the year except for the first two weeks of July when Andrew vacations with his family.

COST TO RUN

Average revenue, including juices (per meal)……… \$ 42

Average cost of the food (per meal)……………………. \$ 12

Chef’s and waiters’ salaries (per year)………………… \$59,920

Rent (premises, equipment) (per month)…………. \$ 4,200

Cleaning (linen and premises) (per month)…………… \$ 840

Replacement of dishes, cutlery, glasses (per month) \$ 300

Utilities, advertising, telephone (per month)…………… …\$ 2,000

Healthy Eating Trends

Obesity is a growing health concern in the U.S. As health awareness grows, people are more likely to eat health. However, Andrew’s restaurant will be the first of its kind in the area. His first concern is whether the idea will find enough takers. He accepts that he might lose money during the first few weeks, but wants to know how many people he must attract to break even.

Breakeven

The formulas are as follows:

Breakeven in units = Total fixed costs_______

Unit contribution margin

Unit contribution margin= Unit sales price – Variable cost per unit

= \$42 – \$12

= \$30

The remaining cost items are considered fixed costs. The monthly cost items must be multiplied by 12 to convert them to yearly totals in order to calculate total fixed costs which amounts to \$ 141,000.

Breakeven point in meals = 141,000 / 30 = 4700 meals

CVP Analysis

Review Decision Case 1 (Steve and Linda Hom) starting on page 984 of your text. In your initial post, answer the two case questions:

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.