Burgers After Drinking, Breakeven Formula, and Target Profit
In college, we always ate “Emmas” for dinner on Saturdays.
Named for Emma, our cook.
Now, Kansas (KU) had both football and basketball games on many Saturday afternoons. We usually lost the football games and won the basketball games.
Of course, these events involved drinking, so I don’t know if I actually tasted the burgers I ate on Saturday nights…
This post explains the breakeven formula and target profit using a restaurant as an example.
Business Environment for Restaurants
Times are tough for many restaurants, as the Wall Street Journal explains:
“Independent restaurants are on financial life support, owners say, squeezed between escalating payroll costs and diners’ dwindling tolerance for ever-higher checks. Wages for waitstaff, table bussers and line cooks will grow more expensive for many eateries this year, with 22 states in January raising the minimum wage for hourly workers.”
Ouch.
Let’s assume that Sally operates Chef Zorba’s in Denver, and restaurant that is used in the Journal story.
Going Over the Target Profit (or Target Net Income) Formula
To make decisions and sales, costs, and prices, Sally starts with the breakeven formula:
[(Sales price per unit) x (Units sold)] – [(Variable cost per unit) x (Units sold)] – (Fixed costs in total dollars) = $0 Profit
As you can see, the formula calculates sales less both variable costs and fixed costs. The goal is to cover all costs with sales.
Not too exciting, but it’s a starting point for business planning is: don’t lose money.
Now let’s assume that Sally is trying to generate an $80,000 profit for the year. Plugging in that profit number and you get her target net income (or target profit):
[(Sales price per unit) x (Units sold)] – [(Variable cost per unit) x (Units sold)] – (Fixed costs in total dollars) = $80,000 Profit
Dealing with Pricing Pressure
How much are you willing the pay for a cheeseburger?
“Chef Zorba’s charges $15.75 for a bacon cheeseburger, $5 more than in 2018. In January, prices for food eaten away from home were up 30% compared with the same month in 2019, Labor Department data showed.”
Consumers are seeing price increases with many products and services. I had to replace an electric razor last week, and the price was 30% higher than I paid about a year ago.
How does that impact Sally’s target profit formula?
It’s less likely that Sally can increase prices to increase total sales dollars. Let’s plug in $15.75 as the sale price per unit:
[($15.75 Sales price per unit) x (Units sold)] – [(Variable cost per unit) x (Units sold)] – (Fixed costs in total dollars) = $80,000 Profit
Adding in Costs
“Denver has increased its minimum wage annually since 2020, most recently in January to $18.29 an hour, while Colorado has expanded paid sick leave and other employee benefit requirements.”
Variable costs
I’ll add to formula, assuming that labor costs per hour and other variable costs total $8 for every burger sold:
[($15.75 Sales price per unit) x (Units sold)] – [($8 Variable cost per unit) x (Units sold)] – (Fixed costs in total dollars) = $80,000 Profit
Fixed costs
Chef Zorba’s fixed costs include rent, insurance, and other expenses. Assume that fixed costs total $150,000 annually.
[($15.75 Sales price per unit) x (Units sold)] – [($8 Variable cost per unit) x (Units sold)] – ($150,000 Fixed costs in total dollars) = $80,000 Profit
Sales Needed to Reach Target Profit
The moment of truth: How many burgers does Sally have to sell to reach the $80,000 target profit?
Hold on to your hat- I’ll use some algebra to solve for the units sold:
[($15.75 Sales price per unit) x (Units sold)] – [($8 Variable cost per unit) x (Units sold)] – ($150,000 Fixed costs in total dollars) = $80,000 Profit
[($7.75 Sales price per unit) x (Units sold)] – ($150,000 Fixed costs in total dollars) = $80,000 Profit
[($7.75 Sales price per unit) x (Units sold)] = $230,000
Units sold = ($230,000) / $7.75 = 29,677 sales per year.
Now, this is an extreme case, because the restaurant may sell dozens of items (not just this one burger). It does, however, give you the process for computing target profit.
Improving Results
What can Sally do to improve the results?
Cutting Costs to Maintain Profits
Once option is to cut costs- one big item is food costs.
“The industry’s economic strains can be seen on the appetizer plate at Chef Zorba’s Restaurant in Denver. (The owner) recently swapped Greek giant beans for homemade stuffed grape leaves to save money, and switched to cheaper shoestring potatoes from thick-cut fries.”
Changing the Business Model
What about shifting more sales to take out, rather than in-person dining?
One restaurant owner “figures it costs him $1 per customer every time someone places a to-go order, because of the extra expense of packaging.” Packaging, utensils, and condiments add to the total cost.
If take out is not the answer, some other new business model might be. Maybe catering?
It’s never easy- but the target profit formula helps you plan and make adjustments.
Food for thought.