1.You juz inherited a million dollars from your grandfather.

You alwas had a

talent for cooking & have long dreamed or opening an expensive gourmet
restaurant.You are happy living near your colleges campus & would like to
open a 4-star restaurant across the street from school
Of course, the restaurant would have certain fixed costs.For example :
management salaries, utilities, interest, license fees, & property taxes.The
only variable costs would be the food, beverages, & 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
2.How many units will you have to sell each year to breakeven?
The chart would show total fixed cost of $440,000 + the variable of $15 & the sale of
price of $27.Substracting $15 from $27 shows that he would make $12 per sale.To
make up the fixed cost would mean selling 36,667 meals ( $440,000:$12).The
breakeven point is 36,667 meals

3.How many units will you have to sell each evening (use a 365-day year) to
breakeven?
He would have to sell about 101 meals a night

4.Considering your community, 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?
It would be difficult in almost any community to sell many meals at $27 each, but in
a college community it would probably not be possible at all.At least, why try when
college students would respond much better to a deli or some other food outlet?

5.How much profit will the restaurant earn on sales of 40,000 meals?
He would make about $40,000 selling 40,000 meals a year.That is not a huge profit
from such a volume restaurant

2.St.Andrews Medical center air ambulance operates out of the hospitals
emergency department.The helicopter transports patients between hospitals
& from accident scenes to St.Andrews emergency department.It is staffed 24/7
by a nurse, a paramedic, & a pilot.Monday through Friday a mechanic and an
office manager are also employed
Annual personnel cost is $440,000 regardless of how many flights are
made.Fuel costs average $65 per flight.Medical supplies add an additional
$235 to each flights cost.The remaining costs are included in the monthly
lease on the helicopter.Each month the emergency department pays the
helicopter owner $45,000
Currently the air ambulance flies about 600 missions a year.The average
amount billed per flight is $2,250, usually paid by the patients insurance
company

1.Calculate the air ambulance annual costs and revenue
a.What is the total annual fixed cost?
The total annual fixed cost is $980,000.The personnel costs ($400,000) are
considered fixed in this case b/c they dont vary with the number of flights(usually
labor costs are variable costs as they vary based on the amount produced).The
annual lease costs are $540,000 ($45,000 x 12)

b.What is the variable cost per flight?
The only 2 variable costs hear are the cost of fuel ($65 per flight) & medical supplies
($235 per flight).The total variable cost per flight is $300

c.At 600 flights per year, what is the total annual cost?
At 600 flights, the total annual cost is $1,160,000.The total fixed cost is $980,000m
and the total variable cost are $180,000 (600 flights x $300)

d.At 600 flights per year, what is the total annual revenue?
Annual revenue is $1,350,000 ($2,250 per flight x 600 flights

e.What is the annual profit or loss at 600 flights?
At 600 flights the hospital earns $190,000 profit

2.Prepare a break-even chart.What is the break-even number of flights?
Breakeven point = TFC : ( P per unit VC of one unit ) = $980,000 : ( $2,250-$300) =
502.6

3.The hospital is considering reducing the number of flights to cut costs.What
would happen to air ambulance programs profit/loss if the number of flights
drops to 500 per year?Would you recommend this strategy?Why or why not?

Reducing the number of flights will only reduce variable costs.Variable costs would
decline from $180,000 at 600 flights to $150,000 at 500 flights ($300 x 500)
However, reducing flights also reduces revenue.Instead of $1,350,000 in total
revenue, the hospital will only have $1,125,000 ($2,250 x 500)
After subtracting fixed costs ($980,000) and variable costs ($300 x 500 = $150,000),
the hospital will actually incur a loss of $5,000 by reducing flights
Revenue : $1,125,000
Expenses : Fixed : $980,000
Variable : $150,000
Loss : $5000
Put another way, saving $30,000 in expenses reduces revenue by $225,000.This
is b/c the fixed costs are so huge.Whether the helicopter flies once a year or 600
times a year, the fixed costs of $980,000 must be paid.Every medical flight will
contribute $1,950 ( $2,250 incom - $300 variable cost) toward paying variable
costs.The hospital should probably look for ways to encourage more usage of the
air ambulance, not less