Question

Using industry averages for fast casual / premium casual dining, assume that Famoso’s overall base revenues this year across 25 locations will be $25 million, cost of goods sold (food and beverages) is 30% of revenue, variable labour costs (e.g. restaurant staff) are also 30% of revenue, marketing costs are $1 million, occupancy and equipment costs are $5 million, and home office administration costs are $2 million. Assume average revenue per transaction of $50.

Opportunity 1: Product improvement Famoso would like to consider taking an even stronger product quality positioning by using organic food ingredients. This is expected to increase food and beverage costs as a percent of sales by 5%. They would make a one-time investment of $100,000 in marketing communications to promote this offering. They believe they could see a sales increase of 10% under this opportunity.

Opportunity 2: Sales promotion Famoso wants your perspective on a free pizza promotion to generate trial and new customer acquisition. They would market the offer via direct email, using address lists likely to avoid current customers. The campaign would reach 300,000 people at a cost of $75,000. They expect that 1% of those who receive the direct mail/email would take advantage of the offer, and spend $25 on their visit beyond the free pizza. For promotion cost purposes, assume that the average retail price of a Famoso pizza is $15. Famoso expects that half of those who participate in the promo would become a “regular” customer, going on to have two more transactions per year.

Opportunity 3: Third-party delivery service Famoso has decided to consider a new distribution option: rolling out the use of a third party service such as Just-eat.ca, Skipthedishes.com, or UberEATS for food deliveries. They have been conducting a market test of this service at one of their 25 locations. The test achieved 1,000 deliveries with an average purchase of $25. Famoso pays the third-party service $5 for each delivery, and will spend $10,000 on in-store signage to promote the delivery option.

1. Given the hypothetical information provided, what is Famoso’s overall break-even point in units? What is this as a percent of their current transaction volume? For this kind of business, units would be the number of tables served / transactions.

2. What is the break-even point in units for the product improvement idea (Opportunity 1)? What percentage sales increase is needed to achieve this break even?

3. What is the incremental transaction volume and variable cost of Opportunity 2?

4. What are the fixed costs of Opportunity 3? Is there a risk related to this investment?

Answer 1

1.)
Breakeven point in units =	Fixed costs / contribution per unit
Fixed costs
Marketing costs	$                                       10,00,000
Occupancy & equipment costs	$                                       50,00,000
Home office administration costs	$                                       20,00,000
Total Fixed costs	$                                      80,00,000
Current sales revenue	$                                    2,50,00,000
S.P	$                                                    50
Current sales units	5,00,000
S.P	$                                                    50
Variable costs:
Cost of goods sold	$                                                    15
Variable labour costs	$                                                    15
Contribution margin per unit	$                                                    20
Breakeven point in units =	80,00,000 / 20
Breakeven point in units =	4,00,000
Breakeven point in units =	4,00,000
Current sales units =	5,00,000
% of current transaction volume =	80%
2.)
Current variable cost per unit =	$                                              30.00
Add:
Increase in food & beverage costs =	$                                                 2.50	50*5%
Variable costs	$                                              32.50
S.P	$                                              50.00
Variable costs	$                                              32.50
Contribution margin per unit	$                                              17.50
Breakeven point in units =	81,00,000 / 17.50
Breakeven point in units =	4,62,857.14
Breakeven point in units =	4,62,858.00
Breakeven point in units =	4,62,858
Current sales units =	5,00,000
% of current transaction volume =	93%
Sales is already at 500,000 units that is greater than BEP
3.) No of people in campaign               3,00,000 Customers that would come                     3,000 Half of which shall comw 2 times                     3,000 Incremental sales units                     6,000 S.P $                      25 Incremental sales $           1,50,000 Incremental variable costs Free of cost $              45,000 On incremental sales $              90,000 Total incremental variable cost $           1,35,000

4.)
Fixed costs of opportunity 3 =	$                                            10,000

These costs would be one time however maintainence of signage shall be fixed costs

Yes there are several risks related to it like

1.) Fierce competetion from other restaurants

2.) Volume that may be very fluctuating

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