Review Of Decision Case 1: Steve And Linda Hom Starting O

Part 1areview Decision Case 1 Steve And Linda Hom Starting On Page

Part 1areview Decision Case 1 (Steve and Linda Hom) starting on page 984 of your text. In your initial post, answer the two case questions: 1. Compute the annual breakeven number of meals and sales revenue for the restaurant. 2. Compute the number of meals and the amount of sales revenue needed to earn operating income of $75,600 for the year. In addition, address the following in one to two paragraphs: 1. Identify and discuss several qualitative factors that should be considered in the decision process in addition to the quantitative data already computed in the case assignment. 2. What are the potential benefits of applying CVP analysis to business decision making? 3. Provide an example of another business scenario that could benefit from CVP analysis and explain how you would apply CVP analysis in the decision-making process.

Paper For Above instruction

Introduction

The decision faced by Steve and Linda Hom to open a Thai restaurant in Bartlesville, Oklahoma, involves multiple financial and qualitative considerations. Applying cost-volume-profit (CVP) analysis enables a comprehensive understanding of the financial implications of their venture, while assessing qualitative factors ensures a balanced decision that considers both numbers and strategic elements.

Calculation of Breakeven Point

To determine the annual breakeven number of meals and sales revenue, we first identify the relevant costs and revenues. The average revenue per meal is $45, with food costs at $15 per meal, translating to a contribution margin per meal of $30. Fixed costs encompass salaries ($61,200 annually), rent ($4,000/month), cleaning ($800/month), replacement of dishes and cutlery ($300/month), and utilities, advertising, and telephone expenses ($2,300/month). These fixed costs total approximately $103,200 annually ($61,200 + ($4,000 + $800 + $300 + $2,300) × 12).

The contribution margin per meal is $30, so the breakeven number of meals is:

Breakeven meals = Total Fixed Costs / Contribution Margin per meal = $103,200 / $30 ≈ 3,440 meals annually.

The sales revenue at breakeven point is:

Revenue = Breakeven meals × Price per meal = 3,440 × $45 = $154,800 annually.

To achieve an operating income of $75,600, additional contribution margin must cover the target operating income:

Required contribution margin = Fixed costs + Target income = $103,200 + $75,600 = $178,800.

Number of meals needed:

= $178,800 / $30 ≈ 5,960 meals annually.

Corresponding sales revenue:

= 5,960 × $45 = $268,200 annually.

Qualitative Factors in Decision Making

In addition to these quantitative calculations, several qualitative factors must be considered. Market demand for Thai cuisine in Bartlesville is unknown; assessing local consumer preferences and competition is critical. The restaurant's location, ambiance, and service quality can influence customer retention and satisfaction. Linda's expertise as a professional chef may differentiate her offerings, but staff training and operational efficiency also impact success. Additionally, economic factors like seasonal fluctuations, local economic health, and cultural acceptance of Thai food could influence profitability.

Furthermore, societal and environmental considerations, such as sourcing ingredients ethically or sustainability practices, could affect community perception and long-term viability. Employee recruitment, retention, and labor relations are also important, especially considering the specialized cuisine and Linda’s supervision role.

Benefits of CVP Analysis

Applying CVP analysis offers several benefits in business decision-making. It simplifies understanding how changes in sales volume, costs, and prices affect profitability. It aids in setting sales targets, determining pricing strategies, and assessing the impact of cost control measures. CVP analysis also assists in evaluating the viability of new projects or products by analyzing different scenarios quickly and effectively.

By isolating the contribution margins and fixed costs, CVP enables managers to focus on the breakeven point, profit margins, and safety margins, thus fostering informed decisions about pricing, product lines, and operational adjustments. Overall, CVP analysis is a vital tool for strategic planning and risk analysis.

Other Business Scenario Benefiting from CVP Analysis

Consider a fitness center planning to introduce a new membership package. Using CVP analysis, management would first calculate the contribution margin per membership by subtracting variable costs (e.g., processing fees or promotional discounts) from the membership fee. Fixed costs include rent, salaries, equipment maintenance, and utilities.

Applying CVP, the fitness center could determine the minimum number of memberships needed to break even and evaluate how different pricing levels or promotional discounts affect profitability. By modeling various scenarios—such as increased fixed costs due to new equipment or variable costs due to promotional campaigns—management gains insights into sustainable pricing and marketing strategies, reducing financial risks and ensuring profitability.

Conclusion

CVP analysis, combined with qualitative considerations, provides a comprehensive framework for strategic decision-making. For Steve and Linda Hom, these tools help quantify the financial requirements to sustain and grow their restaurant project, while qualitative factors guide their understanding of market and operational risks. Such integrated analysis maximizes the likelihood of successful venture initiation and long-term profitability.

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