Rick’s English Hut

Multi-product CVP Analysis

Problem Statement

Current • Current operations are not

Sales (Food) in $ $ 27,000 sustainable
Sales (liquor) in $ 33,000
Total sales $ 60,000 • Regulation that food sales
be at least 50%
CMR (Food) in % 20%
CMR (liquor) in % 50%

Current fixed cost ($) $ 10,950 • Which of the three options

considered is the best?
Evaluation: Current state
CMR (food = 45%) 20%
• Liquor has much higher
CMR (liquor = 55%) 50%
CMR than food

Weighted CMR 36.5% • Fixed costs are joint

• No sense in allocating to
Breakeven revenue $30,000 individual products
Current profit $10,950
Operating Leverage 200.0% • The firm is doing well
Margin of safety 50.0%
 Evaluation: Buy license for $1,168
CMR (food) 20% • Option merely adds to fixed
CMR (liquor) 50% costs. Sales still at 33K for
liquor and 27K for food.
Weighted CMR 36.5%
• Bad outcomes
• Increases break even volume
• Decreases margin of safety
Old Fixed cost $10,950
• Increase operating leverage
Additional fixed cost 1,168
Total fixed cost $12,118
• In general, adding fixed
Breakeven revenue $33,200
costs is not profit
maximizing
Profit 9,782 • Need to have off-setting
Operating Leverage 223.9% incremental revenue
Margin of safety 44.7%
 Evaluation: Close early & lose liquor sales
CMR (food; 50% share) 20% • Option reduces revenue of
more profitable product! Sales
CMR (liquor; 50% share) 50% of $27K each for liquor and for
food
Weighted CMR 35.0%
• Bad outcomes
• No change in break even
volume (FC and CMR offset)
Old Fixed cost $10,950 • Decreases margin of safety
• Increase operating leverage
Additional fixed cost (450)
Total fixed cost $10,500
• In general, getting rid of
revenue is not good unless we
can get rid of fixed costs as
Breakeven revenue $30,000 well
• Need to offset $3,000 (CM from
Profit 8,400 lost sales of $6,000 in liquor) for
Operating Leverage 225.0% same profit
Margin of safety 44.4%
 Evaluation: Sell brunch for a loss
CMR (food; 40.91% share) 20% • Option adds a “loss leader”
CMR (liquor; 50% share) 50% • Brunch adds $6K to current
sales
CMR (brunch; 9.09% share) -2%
• Selling for less than variable
cost!
Weighted CMR 33.0%
• Best outcome
Old Fixed cost $10,950 • Breakeven goes up a bit
• OL is a bit higher
Additional fixed cost 105
• MOS is a bit lower
Total fixed cost $11,055
• How can this be?
• Adding small fixed cost
Breakeven revenue $33,500
• Loss per $ in brunch in small
Profit 10,725 • Sales of brunch are also low
Operating Leverage 201.9%
Margin of safety 49.5%
Take away points
• Role for regulation

• Effect of loss leader

• It is not proper to analyze each product separately when the

fixed costs are joint
• Generally, we even add “traceable” fixed costs to obtain one total
fixed costs
• Analysis is at the firm level

• Might be OK to do individual product level analysis IF

common fixed costs are “small” and the traceable fixed cost
is “large”
Larger issues
• Is Rick solving the right problem?

• The choice is one of strategy – what business does Rick want

to run?

• If Bar – Get license & max out on liquor sales

• If Restaurant – we have to find ways to increase food sales

• Brunch may add a lot to the workload & impinge on life style issues
• Is additional fixed cost only $105? What about OC of his time?

• Create new options: Increase liquor prices and lower food prices?