operations budgeting and cvp analysis

Operations Budgeting and CVP Analysis-II

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 1 / 33

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.

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 2 / 33

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.

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 3 / 33

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

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 4 / 33

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 CostsSunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 5 / 33

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 RateSunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 6 / 33

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

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 7 / 33

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

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 8 / 33

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.

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 9 / 33

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

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 10 / 33

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).

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 11 / 33

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).

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 12 / 33

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

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 13 / 33

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.

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 14 / 33

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.Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 15 / 33

Graphical Representation example for CVP Equation

• Break-even is defined numerically as:• BE = Total Sales or Total Sales

1- VR CM

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 16 / 33

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 17 / 33

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 18 / 33

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

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 19 / 33

Calculating Break even

Financial Data of Dishits Highlander restaurant

Estimated Unit Sales Item Name Unit VC Unit SP VR Total VC Total Sale PSTS

    $ $   $ $ $

10 Steaks 10.00 16.00 0.625 100.00 160.00 0.3478

10 Scallops 6.00 12.00 0.5 60.00 120.00 0.2609

10 Chicken 4.00 10.00 0.4 40.00 100.00 0.2174

10 Spaghetti 2.00 8.00 0.25 20.00 80.00 0.1739

    22.00 46.00   220.00 460.00 1.00

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 20 / 33

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

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 21 / 33

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.

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 22 / 33

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 23 / 33

Alternate method of calculating Variable rate

Item Name VR PSTS Weighted VR

Steak 0.625 0.3478 0.2174

Scallops 0.5 0.2609 0.1305

Chicken 0.4 0.2174 0.0870

Spaghetti 0.25 0.1739 0.0435

VR Total Average

= 0.4784

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 24 / 33

Changing the Break-even point

• The managements try and make adjustments to the business volume to match the potential market.

1. Increase menu prices.

2. Reduce variable costs.

Sunday, April 9, 2023 BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 25 / 33

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

Sunday, April 9, 2023BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 26 / 33

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

Sunday, April 9, 2023BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 27 / 33

Sunday, April 9, 2023BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 28 / 33

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

Sunday, April 9, 2023BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 29 / 33

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.

Sunday, April 9, 2023BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 30 / 33

Sunday, April 9, 2023BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 31 / 33

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

Sunday, April 9, 2023BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis Slide 32 / 33

Questions

CommentsSunday, April 9, 2023

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