Multi-product case

The restaurant Easy Lunch provides its services to passengers in transit at the Ms
city airport. Easy Lunch offers its customers two alternative set menus:

Option A is a standard menu, which is served at 10 euros.

Option B is a special menu, which is offered at 15 euros.

The restaurant has a capacity to serve 19,500 set meals per month. This restaurant
opens all year round.
Additional operating data are given in the following table:
Standard
menu

Special
menu

Total number of set meals served

117,000

63,000

Annual costs of food (variable) (VC) (VC/Q)

110,000

150,000

40,000

55,000

25,000

3.5

4.25

Concept

Annual costs of beverage (variable) (VC) (VC/Q)

Annual costs of ingredients desserts (variable) (VC)
Personnel unit costs (euros/menu) (AVC)
Information on costs also includes:

Annual rent: 400,000 euros/year. (fixed)

Advertising 130,000 euros/year. (fixed)
Maintenance costs: 100,000 euros/year. (fixed)

From the above data:

Calculate the break-even point for the restaurant in number of meals served
and in restaurant occupancy rate.
Solution
Here we have the case of a multi-product company. This is so since Easy Lunch offers
two types of set menus, each of one has a given selling price and given variable costs.
Then, in order to calculate the break-even point, we have to use the following formula:

X B=

FC
1 ( SP1 AVC 1 ) + 2 ( SP2 AVC 2 )

Let us start by calculating the fixed costs:

FC= Annual rent + Advertising+ Maintenace costs=400,000+130,000+100,000=630,000 euros

Then, we can proceed by calculating the average variable costs for each type of menu:
In the case of the first type of menu, we have that:

AVC 1=

100,000+ 40,000
+3.5=4.78 euros/menu
117,000

Similarly for the second type of menu, we have that:

AVC 2=

150,000+ 55,000+25,000
+ 4.5=7.90 euros /menu
63,000

Finally, we have to calculate the weights corresponding to each contribution margin:

1=

x1
117,000
=
=0.65
X 117,000 +63,000

2=

x1
63,000
=
=0.35
X 117,000 +63,000

Now, we are in a position to calculate the break-even point:

X B=

630,000
=107,209 menus/ year
0.65 ( 104.78 ) +0.35 ( 157.90 )

This is the minimum amount of menus Easy Lunch should serve in order to start
producing positive profits.
The occupancy rate at the break-even point is given as follows:

RO B=

107,209
=0.4581 45.81
19,500 x 12

With an occupancy rate higher than 45.81%, the restaurant is able to generate positive
profits.
Seasonality problems
Given the decrease in demand during the period of December-February, the operations
management is considering the possibility to close the restaurant. Under the shutdown scenario, the restaurant would save 35% of the maintenance costs. The tasks of
closing and reopening would amount to 10,000 euros.
By using this information:
What must the predicted minimum amount of menus be in the low season in
order to decide to keep the restaurant open?

Solution
In order to estimate this threshold, we will use the following formula:

XT =

MOC PC
1 ( SP 1AVC 1 ) + 2 ( SP2 AVC 2 )

According to prior information, we know that:

MOC=0.35 x 100,000=35,000 euros

Now, we can apply the formula given above:

XT =

35,00010,000
=4,258 menus
0.65 (104.78 )+ 0.35 (157.90 )

We a volume higher than 4,258 menus, Easy Lunch could keep the business running
every day of the year. With at least this amount of menus, the weighted average
contribution margin would allow the restaurant to cover the saving (reduction in fixedcosts) it would have under the prospect of closing.