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It is very common for food and beverage management to be faced with problems concerning the level of food and beverage cost that can be afforded, the prices that need to be set for food and beverages, the level of profit required at departmental and unit level and the number of customers required to cover specific costs or to make a certain level of profit. Typical questions raised are:
1. What level of sales is needed to cover the fixed costs of a unit?
2. What level of sales is required from a particular unit to achieve £x’s net profit?
3. What level of sales is required to increase the net profit of a unit by £10,000?
4. What will the effect of increasing prices by 5% have on net profit?
5. What will be the effect on net profit of increasing the average spend of customers by 50p per meal?
6. What increased level of sales must be obtained to cover the spending of £1,000 on advertising to promote the restaurant?
7. What will be the financial implications of discounting beverages during a proposed promotion?
8. What is the relationship between the capital invested in a restaurant and its sales and profit?
Answers to the above types of question are normally attempted by using the accepted technique of break-even analysis. Break-even analysis enables the relationship between fixed, semi-fixed and variable costs at specific volumes of business to be conveniently represented on a graph.
Break-even analysis
Break-even analysis entails the calculation and examination of the margin of safety for an entity based on the revenues collected and associated costs. Analyzing different price levels relating to various levels of demand, an entity uses break-even analysis to determine what level of sales are needed to cover total fixed costs.
The break-even point (BEP) or break-even level represents the sales amount—in either unit (quantity) or revenue (sales) terms—that is required to cover total costs, consisting of both fixed and variable costs to the company. Total profit at the break-even point is zero.
Advantages of Break-even analysis
1. Profit planning
2. Product planning
3. Activity Planning
4. Lease Decisions
5. Make or buy decisions
6. Capital profit decisions
7. Distribution channel decisions
8. Price decisions
9. Choosing Promotion Mix
10. Decision regarding the profitability of products or department.
Read Next in this unit
B. P V Ratio
C. Contribution
After you complete this unit here is a pdf of few solved Breakeven Numericals problems on Breakeven Analysis. Must go through it once to get a better practical understanding of Breakeven Analysis.