1. Operations Budgeting and CVP Analysis-II BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 1 / 33 Monday, August 22, 2011

2. Recap of CVP relationships What is the Cost/ Volume and Profit equation. How to find Variable Rate Establish Contribution Rate How to derive Contribution margin Way to Calculate break-even point numerically. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 2 / 33 Monday, August 22, 2011

3. KCM of this session What is the CVP equation. List the formulas leading to Sales. What is the Break even. How to use averages in calculating sales. Calculating Break even point Graphically and arriving at the number of covers required for a sale equivalent. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 3 / 33 Monday, August 22, 2011

4. Scope Formulas in Calculation. Using Averages. To determine Average Contribution Margin. Break Even Point. Graphical Representation example for CVP Equation. Alternate method of calculating Variable rate. Changing the Break-even point BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 4 / 33 Monday, August 22, 2011

5. Formulas in Calculation Variable Rate = Variable cost/ Sales Contribution Rate = ( 1- Variable rate) CR = 1- VR S= VC+ FC+ P CM = Total Costs – Main Variable Costs BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 5 / 33 Monday, August 22, 2011

6. Formulas in Calculation Formulas S= FC + P 1-VR CR = FC + P S P = (S x CR) –FC FC = ( S x CR) –P Example Fixed Costs = $ 160000.00 Sales = $ 500,000.00 Profit Target = $ 40,000.00. Establish: Contribution Rate BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 6 / 33 Monday, August 22, 2011

7. Using the formula CR = FC + P S CR= $160,000.00 + $ 40,000.00 $ 50,000.00 CR = 0.4 Since CR = 1 – VR VR= 0.6 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 7 / 33 Monday, August 22, 2011

8. Using Averages Average Dollar sale is also known as Average Check. Average Check = Total Sale/ total Guests Average Variable rate = VC/ Total Guests Example: Sales = $ 48,000.00 Variable Costs= $ 18,000.00 Customer Count = 3000 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 8 / 33 Monday, August 22, 2011

9. Using Averages Average Dollar sales = $ 48000/3000 Customer count = $ 16.00 average dollar sale. Similarly $ 18,000 VC= $ 6.00 average Variable rate 3000 Customers. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 9 / 33 Monday, August 22, 2011

10. To determine Average Contribution Margin CM = Sales – VC ACM = SP – AVC Which is = $ 16.00 – 6.00 = $ 10.00 Unit Sales = Fixed Costs Contribution Margin Per unit sale BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 10 / 33 Monday, August 22, 2011

11. Break Even Analysis A calculation of the sales volume (in units) required to just cover costs. A lower sales volume would be unprofitable and a higher volume would be profitable. Break-even analysis focuses on the relationship between fixed cost, variable cost (or cost per unit), and selling price (or selling price per unit). BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 11 / 33 Monday, August 22, 2011

12. Break Even Point The sales volume (express as units sold) at which the company breaks even. Profits are $0 at the break even point. The break even point is calculated by the following formula: Break Even Point = Fixed Costs / (selling price-variable costs). BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 12 / 33 Monday, August 22, 2011

13. Graphical Representation example for CVP Equation Example: Luvins Campers Delight Restaurant for one item: Sales price per item : $ 16.00 Variable Cost: $ 6.00 Fixed Costs: 30,000.00 CM = SP per Item- VC= $ 16-$6 = $10 Unit sales required = FC 30000 =3000 CM $ 10.00 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 13 / 33 Monday, August 22, 2011

14. Graphical Representation example for CVP Equation Average Sales Price= Total Sales Total Customers Average Sales Price = $ 48000/3000= $ 16 Average VC = Variable cost Total Customers Average VC = $ 18,000/ 3000 = $ 6.00 The “X” Axis represents the unit sales from $ 500.00 to $ 4000.00. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 14 / 33 Monday, August 22, 2011

15. Graphical Representation example for CVP Equation The “Y” axis represents Cost and sales in dollars. ACM = Average SP – Average VC ACM = $ 16.00 - $ 6.00 = $ 10.00 Unit sales required to meet the fixed costs Unit sales required = FC($30000.00) ACM $ 10.00 Draw a straight line first from $ 30,000 which is represented as fixed cost. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 15 / 33 Monday, August 22, 2011

16. Graphical Representation example for CVP Equation Break-even is defined numerically as: BE = Total Sales or Total Sales 1- VR CM BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 16 / 33 Monday, August 22, 2011

17. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 17 / 33 Monday, August 22, 2011

18. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 18 / 33 Monday, August 22, 2011

19. Calculating Break even Dishit’s Highlander Inn is a small restaurant without liquor license sells 4 items Steaks, Scallops, Chicken and Spaghetti. In the matrix on the next slide are given details. To calculate the Break Even using average variable rate and Proportional sales to the total sales when FC are $ 128656.00 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 19 / 33 Monday, August 22, 2011

20. Calculating Break even BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 20 / 33 Monday, August 22, 2011

21. Calculating Break even Total Variable rate = Total Variable cost/ Total sales $ 220.00/$460.00 = 0.478 Break even is calculated as $ Total sales/ 1- Variable Rate. BE = Total Sales/ CR = $ 128656/1-0.478 $ 128656/0.522= $ 246467.43 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 21 / 33 Monday, August 22, 2011

22. Calculating Break even To find Average Check of the restaurant its Average Sale/Total Customers = $ 460.00/ 40= $ 11.50. To find the customers at break even level = BEP/Average Per cover= $ 246467.43/ $ 11.50 = 21432 Customers. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 22 / 33 Monday, August 22, 2011

23. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 23 / 33 Monday, August 22, 2011

24. Alternate method of calculating Variable rate BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 24 / 33 Monday, August 22, 2011

25. Changing the Break-even point The managements try and make adjustments to the business volume to match the potential market. Increase menu prices. Reduce variable costs. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 25 / 33 Monday, August 22, 2011

26. Changing the Break-even point Using Luvins restaurant as an example: Sales: $ 48,000.00: VC: $ 18,000 Customers: 3000 Average SP: $ 16.00 Average VC: $ 6.00: Average CM: $ 10.00: FC: $ 30000.00 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 26 / 33 Monday, August 22, 2011

27. Changing Break even by increasing Sales Price Increase SP from $ 16.00 to $ 18.00. VR = $6.00/ $ 18.00 = 0.3333 BE = $ 30000/1- 0.3333 = $ 44997.75 Fixed Costs remain the same: $ 30,000.00 Variable cost remain the same: $ 6.00 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 27 / 33 Monday, August 22, 2011

28. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 28 / 33 Monday, August 22, 2011

29. Changing Break even by reducing Variable costs If Luvin decides to reduce the portion size or take other measures to reduce the cost of the portion served by $ 0.50, a new break even point is calculated as follows: FC is the same: $ 30,000.00 VC changes from $ 6.00 to $ 5.50 Sales price as original: $ 16.00 VR = $ 5.50/$ 16.00 = 0.34375 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 29 / 33 Monday, August 22, 2011

30. Changing Break even by reducing Variable costs Break Even is = $ 30,000/1- 0.34375 = $ 30,000/ 0.65625 = $ 45714.29 After plotting the figures on the graph its noticed that approximately 2858 customers which is a decrease of 142 customers is required to break even. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 30 / 33 Monday, August 22, 2011

31. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 31 / 33 Monday, August 22, 2011

32. Web links to Break even analysis http://www.fast4cast.com/break-even-calculator.aspx http://en.wikipedia.org/wiki/Break-even_(economics) http://cpa.utk.edu/pdffiles/adc3.pdf BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 32 / 33 Monday, August 22, 2011

33. Questions  Comments BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 33 / 33 Monday, August 22, 2011