Question

a burger joint needs a $25,000 start up fee. the base demand for the burger buns is 40,000 patties per year with a decrease of 8,000 patties per year for every dollar the price increases past 0.The total cost for each patty is 1 dollar per patty. A pizza cafe needs a $18,000 start up fee the base demand for the slices is 60,000 per year with a decrease of 15,000 per year for every dollar the price increases past 0. The total cost for each slice is .50c per slice Demand for either food will increase 5 percent every year following year 1. What enterprise will be more profitable over 5 years not accounting for depreciations just cash flows. show work show percentage return. use excel

Answer 1

For burger Joint:

Step1: Computation of the price of one Burger Bun patties.We have,

Let the price of one buger be P

Quantity demanded = 40,000 - 8,000 P

Revenue Generated = P(40,000 - 8,000P)

Total cost for one burger= $ 1

Profit = (P - 1) ( 40,000 - 8,000 P)

Net profit = (P -1) ( 40,000 - 8,000P) - 25,000

The maximization of profit would occur at P = 3.

Net profit = (3 - 1) ( 40,000 - 8,000 x 3) - 25,000

Net profit = $ 7,000

Cash flow over 5 Years.We have,

Year	1	2	3	4	5	Total
Price($)	3	3	3	3	3
Less: Variable cost	1	1	1	1	1
Contribution	2	2	2	2	2
Quantity Demanded	40,000	42,000	44,100	46,305	48,620
Less: Decrease in quantity	24,000	24,000	24,000	24,000	24,000
Net Quantity demanded	16,000	18,000	20,100	22,305	24,620
Total contribution	32,000	36,000	40,200	44,610	49,240
Less: Fixed Cost	25,000	25,000	25,000	25,000	25,000
Net Profit	7,000	11,000	15,200	19,610	24,240	77,050

Total Percentage Return over 5 Year = 77,050 / 25,000 = 3.082*100 = 308.20 %

For Pizza cafe:

Let the price of one pizza be P

Quantity demanded = 60,000 - 15,000 P

Revenue Generated = P(60,000 - 15,000P)

Total cost for one pizza= $ 0.50

Profit = (P - 0.5) ( 60,000 - 15,000 P)

Net profit = (P -0.50) ( 60,000 - 15,000P) - 18,000

The maximization of profit would occur at P = 1.

Net profit = (1 - 0.5) ( 60,000 - 15,000x 1) - 18,000

Net profit = $ 4,500

Cash flow over 5 Years.We have,

Year	1	2	3	4	5	Total
Price($)	1	1	1	1	1
Less: Variable cost	0.5	0.5	0.5	0.5	0.5
Contribution	0.5	0.5	0.5	0.5	0.5
Quantity Demanded	60,000	63,000	66,150	69,457	72,930
Less: Decrease in quantity	15,000	15,000	15,000	15,000	15,000
Net Quantity demanded	45,000	48,000	51,150	54,457	57,930
Total contribution	22,500	24,000	25,575	27,228	28,965
Less: Fixed Cost	18,000	18,000	18,000	18,000	18,000
Net Profit	4,500	6,000	7,575	9,228	10,965	38,268

Total Percentage Return over 5 Year = 38,268 / 18,000 = 2.126*100 = 212.60 %

Total return over 5 year for Burger Bun shall be 308.20 % and total return over 5 year for pizza slice shall be 212.60%. So, Burger bun is more profitable than pizza slice.