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Operations budgeting and cvp analysis

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Operations budgeting and cvp analysis

1. 1. Operations Budgeting and CVP Analysis-II<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 1 / 33<br />Monday, August 22, 2011<br />
2. 2. Recap of CVP relationships<br />What is the Cost/ Volume and Profit equation.<br />How to find Variable Rate<br />Establish Contribution Rate<br />How to derive Contribution margin<br />Way to Calculate break-even point numerically.<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 2 / 33<br />Monday, August 22, 2011<br />
3. 3. KCM of this session<br />What is the CVP equation.<br />List the formulas leading to Sales.<br />What is the Break even.<br />How to use averages in calculating sales.<br />Calculating Break even point Graphically and arriving at the number of covers required for a sale equivalent.<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 3 / 33<br />Monday, August 22, 2011<br />
4. 4. Scope<br />Formulas in Calculation.<br />Using Averages.<br />To determine Average Contribution Margin.<br />Break Even Point.<br />Graphical Representation example for CVP Equation.<br />Alternate method of calculating Variable rate.<br />Changing the Break-even point<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 4 / 33<br />Monday, August 22, 2011<br />
5. 5. Formulas in Calculation<br />Variable Rate = Variable cost/ Sales<br />Contribution Rate = ( 1- Variable rate)<br />CR = 1- VR<br />S= VC+ FC+ P<br />CM = Total Costs – Main Variable Costs<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 5 / 33<br />Monday, August 22, 2011<br />
6. 6. Formulas in Calculation<br />Formulas<br />S= FC + P<br /> 1-VR<br />CR = FC + P<br /> S<br />P = (S x CR) –FC<br />FC = ( S x CR) –P<br />Example<br />Fixed Costs = \$ 160000.00<br />Sales = \$ 500,000.00<br />Profit Target = \$ 40,000.00.<br />Establish: Contribution Rate<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 6 / 33<br />Monday, August 22, 2011<br />
7. 7. Using the formula<br />CR = FC + P<br /> S<br />CR= \$160,000.00 + \$ 40,000.00<br /> \$ 50,000.00<br />CR = 0.4<br />Since CR = 1 – VR<br />VR= 0.6<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 7 / 33<br />Monday, August 22, 2011<br />
8. 8. Using Averages<br />Average Dollar sale is also known as Average Check.<br />Average Check = Total Sale/ total Guests<br />Average Variable rate = VC/ Total Guests<br />Example:<br />Sales = \$ 48,000.00<br />Variable Costs= \$ 18,000.00<br />Customer Count = 3000<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 8 / 33<br />Monday, August 22, 2011<br />
9. 9. Using Averages<br />Average Dollar sales <br />= \$ 48000/3000 Customer count<br />= \$ 16.00 average dollar sale.<br />Similarly <br />\$ 18,000 VC= \$ 6.00 average Variable rate<br /> 3000 Customers.<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 9 / 33<br />Monday, August 22, 2011<br />
10. 10. To determine Average Contribution Margin<br />CM = Sales – VC<br />ACM = SP – AVC<br />Which is = \$ 16.00 – 6.00 = \$ 10.00<br />Unit Sales = Fixed Costs<br /> Contribution Margin Per unit sale<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 10 / 33<br />Monday, August 22, 2011<br />
11. 11. Break Even Analysis<br />A calculation of the sales volume (in units) required to just cover costs.  <br />A lower sales volume would be unprofitable and a higher volume would be profitable. <br />Break-even analysis focuses on the relationship between fixed cost, variable cost (or cost per unit), and selling price (or selling price per unit).<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 11 / 33<br />Monday, August 22, 2011<br />
12. 12. Break Even Point<br />The sales volume (express as units sold) at which the company breaks even.  <br />Profits are \$0 at the break even point.  <br />The break even point is calculated by the following formula: Break Even Point = Fixed Costs / (selling price-variable costs).<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 12 / 33<br />Monday, August 22, 2011<br />
13. 13. Graphical Representation example for CVP Equation<br />Example: Luvins Campers Delight Restaurant for one item:<br />Sales price per item : \$ 16.00<br />Variable Cost: \$ 6.00<br />Fixed Costs: 30,000.00<br />CM = SP per Item- VC= \$ 16-\$6 = \$10<br />Unit sales required = FC 30000 =3000<br /> CM \$ 10.00<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 13 / 33<br />Monday, August 22, 2011<br />
14. 14. Graphical Representation example for CVP Equation<br />Average Sales Price= Total Sales<br /> Total Customers<br />Average Sales Price = \$ 48000/3000= \$ 16<br />Average VC = Variable cost<br /> Total Customers<br />Average VC = \$ 18,000/ 3000 = \$ 6.00<br />The “X” Axis represents the unit sales from \$ 500.00 to \$ 4000.00.<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 14 / 33<br />Monday, August 22, 2011<br />
15. 15. Graphical Representation example for CVP Equation<br />The “Y” axis represents Cost and sales in dollars.<br />ACM = Average SP – Average VC<br />ACM = \$ 16.00 - \$ 6.00 = \$ 10.00<br />Unit sales required to meet the fixed costs<br />Unit sales required = FC(\$30000.00)<br /> ACM \$ 10.00<br />Draw a straight line first from \$ 30,000 which is represented as fixed cost.<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 15 / 33<br />Monday, August 22, 2011<br />
16. 16. Graphical Representation example for CVP Equation<br />Break-even is defined numerically as:<br />BE = Total Sales or Total Sales<br /> 1- VR CM<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 16 / 33<br />Monday, August 22, 2011<br />
17. 17. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 17 / 33<br />Monday, August 22, 2011<br />
18. 18. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 18 / 33<br />Monday, August 22, 2011<br />
19. 19. Calculating Break even<br />Dishit’s Highlander Inn is a small restaurant without liquor license sells 4 items Steaks, Scallops, Chicken and Spaghetti.<br />In the matrix on the next slide are given details.<br />To calculate the Break Even using average variable rate and Proportional sales to the total sales when FC are \$ 128656.00<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 19 / 33<br />Monday, August 22, 2011<br />
20. 20. Calculating Break even<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 20 / 33<br />Monday, August 22, 2011<br />
21. 21. Calculating Break even<br />Total Variable rate = Total Variable cost/ Total sales<br />\$ 220.00/\$460.00 = 0.478<br />Break even is calculated as \$ Total sales/ 1- Variable Rate.<br />BE = Total Sales/ CR = \$ 128656/1-0.478<br />\$ 128656/0.522= \$ 246467.43<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 21 / 33<br />Monday, August 22, 2011<br />
22. 22. Calculating Break even<br />To find Average Check of the restaurant its Average Sale/Total Customers = \$ 460.00/ 40= \$ 11.50.<br />To find the customers at break even level<br />= BEP/Average Per cover= \$ 246467.43/ \$ 11.50 = 21432 Customers.<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 22 / 33<br />Monday, August 22, 2011<br />
23. 23. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 23 / 33<br />Monday, August 22, 2011<br />
24. 24. Alternate method of calculating Variable rate<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 24 / 33<br />Monday, August 22, 2011<br />
25. 25. Changing the Break-even point<br />The managements try and make adjustments to the business volume to match the potential market.<br />Increase menu prices.<br />Reduce variable costs.<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 25 / 33<br />Monday, August 22, 2011<br />
26. 26. Changing the Break-even point<br />Using Luvins restaurant as an example:<br />Sales: \$ 48,000.00: VC: \$ 18,000<br />Customers: 3000 Average SP: \$ 16.00<br />Average VC: \$ 6.00: Average CM: \$ 10.00: FC: \$ 30000.00<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 26 / 33<br />Monday, August 22, 2011<br />
27. 27. Changing Break even by increasing Sales Price<br />Increase SP from \$ 16.00 to \$ 18.00.<br />VR = \$6.00/ \$ 18.00 = 0.3333<br />BE = \$ 30000/1- 0.3333 = \$ 44997.75<br />Fixed Costs remain the same: \$ 30,000.00<br />Variable cost remain the same: \$ 6.00<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 27 / 33<br />Monday, August 22, 2011<br />
28. 28. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 28 / 33<br />Monday, August 22, 2011<br />
29. 29. Changing Break even by reducing Variable costs<br />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:<br />FC is the same: \$ 30,000.00<br />VC changes from \$ 6.00 to \$ 5.50<br />Sales price as original: \$ 16.00<br />VR = \$ 5.50/\$ 16.00 = 0.34375<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 29 / 33<br />Monday, August 22, 2011<br />
30. 30. Changing Break even by reducing Variable costs<br />Break Even is = \$ 30,000/1- 0.34375<br />= \$ 30,000/ 0.65625 = \$ 45714.29<br />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.<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 30 / 33<br />Monday, August 22, 2011<br />
31. 31. BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 31 / 33<br />Monday, August 22, 2011<br />
32. 32. Web links to Break even analysis<br />http://www.fast4cast.com/break-even-calculator.aspx<br />http://en.wikipedia.org/wiki/Break-even_(economics)<br />http://cpa.utk.edu/pdffiles/adc3.pdf<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 32 / 33<br />Monday, August 22, 2011<br />
33. 33. Questions <br /> <br />Comments<br />BAC-5132 Food and Beverage Management-II-Operations Budgeting and CVP analysis<br />Slide 33 / 33<br />Monday, August 22, 2011<br />