The owners of Backstreets Italian Restaurant are considering

The owners of Backstreets Italian Restaurant are considering starting a delivery service for

pizza and their other Italian dishes in the small college town where they are located. They

can purchase a used delivery van and have it painted with their name and logo for $21,500.

They can hire part-time drivers who will work in the evenings from 5

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. to 10

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. for

$8 per hour. The drivers are mostly college students who study at the restaurant when they

are not making deliveries. During the day, there are so few deliveries that the regular employ-

ees can handle them. The owners estimate that the van will last 5 years (365 days per year)

before it has to be replaced and that each delivery will cost about $1.35 in gas and other

maintenance costs (including tires, oil, scheduled service, etc.). They also estimate that on

average each delivery order will cost $15 for direct labor and ingredients to prepare and

package, and will generate $34 in revenue.

a. How many delivery orders must Backstreets make each month in order for the service to

break even?

The answer should be 89.24

b. The owners believe that if they have approximately the break-even number of deliveries dur-

ing the week, they will at least double that number on Fridays, Saturdays, and Sundays. If

that’s the case, how much profit will they make, at a minimum, from their delivery service

each month (4 weeks per month)?

The answer should be $638.18

I need to work showed.

Thanks

Solution

A. in order to find the break even point we need to find when the fixed cost equals the revenue - variable costs

Our fixed cost here is 21,500 over 5 years

our variable costs are $15 for Direct labor and ingredients
$1.35 for gas
Revenue of $34

34-1.35-15 = 17.65

we also need to factor in the delivery people which cost $40 PER DAY = 73,000(5*365*40) over 5 years

so over the course of 5 years we need to make($73000+$21500) 94,500/17.65 = 5354 deliveries. divide that by 60 months to get a monthly amount of 89.233 which means 90 deliveries per month to break even.

B. So we are assuming here we are hitting 90 deliveries per month plus the added break even days. If that\'s the case we are hitting 22.5 deliveries per week. Let\'s round that up to 23. The wording on this question is a bit ambiguous here about what it is asking. I think what it is asking is if the company is on track to hit the required weekly deliveries (23) then they will do twice as well on Friday Saturday on Sunday. If that is the case then they are hitting (89.23/30) a day. That means that they would do about an extra (89.23/30)*3=8.923 during the weekend(i.e fri,sat,sun).

8.923 extra every week means (8.923*4)=35.692 extra deliveries every month. 35.692 extra deliveries in a month = 17.65 *35.692 = 629.9638 extra dollars in profit extra every month minimum.

If you are confused about anything I wrote or feel I made a wrong assumption just comment and let me know.