Online Custom «Analysis of Mexican Taco Restaurant’s Turnover» Essay Sample
The break-even point can be calculated using the formula:
Break-even point (number of meals) =Fixed costs/ (Average order price-average order cost).
The fixed costs comprise of the building lease of $2,000 per month, the electricity expense of $500 per month, and labor of $3,100 per month. Together, the fixed costs amount to 3,100 + 500 + 2,000 = $ 5,600 per month. The average order price is $7, whereas the average variable cost per order is $3. Therefore, the contribution margin per order is $4. The fixed costs of $5,600 per month and the contribution margin of $4 per order allow calculating the break-even point value: 5,600/4 = 1,400 orders. The break-even sales that the restaurant requires amount to 1,400*7 = $ 9,800. Therefore, before the restaurant makes a profit, it has to sell at least 1,400 orders that will generate revenue that is at least $ 9,800.
If the restaurant sells a little less than 1000 meals, the profit level may not sustain the business in the long term. At 1000 meals, the contribution towards the fixed costs and the profit amounts to 1000*4= $4,000. The business incurs fixed costs of $5,600 per month. This suggests that after paying the monthly fixed costs of production, the restaurant is only left with $4,000-$5,600= -$1,600 as the loss. Given that the sales revenue from 1000 meals is 1000*7= $7,000, the profit margin is -$1,600/$7,000 = -0.2285. A profit margin of -22.85% may not secure the business since after factoring other costs such as the financing cost, it may turn out that the restaurant has great losses. The profit margin is even likely to be lower since the -22.85% margin was calculated under the assumption that the restaurant sells 1000 meals, although the current problem is that the sales fall slightly below $1000 per month.
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To change this situation, the restaurant must realize a higher turnover to contribute towards profit increase. Currently, the sales revenue covers the fixed and variable costs sufficiently but it is not substantive enough to generate huge profits. Although a higher turnover will result in an increase in the variable costs of production, the contribution towards the profit will grow faster than the variable costs resulting in a net growth in profitability. The options available to the restaurant in its quest to increase its turnover include creating a high level of awareness of the restaurant’s product offered among its target demographic, and lowering the unit prices of its meals to stimulate demand. Increasing the level of awareness about the restaurant’s products may require promotional campaigns. These activities will require expenditures that are likely to increase the firm’s fixed costs.
While the growth of the fixed costs is likely to increase the contribution margin that is required for the company to make profit, a surge in sales revenue following extensive promotional activities may exceed the increase in the fixed costs, resulting in a higher contribution towards the profit after covering the fixed costs. The restaurant can also reduce the price of its meals. This may result in higher demand, leading to increased sales and revenue. The growth in the sales volume may lead to higher revenue that will compensate for the lowering in unit meal prices. A high turnover following increased demand because of low prices may also lower the fixed costs in real terms. With a high turnover, the fixed costs are spread over a larger number of units, resulting in enhanced efficiency. The company has to ensure that the reduced prices will stimulate high demand because if the demand remains as it is currently, an operating loss is inevitable.