Question

Due to the temporary downturn in the economy, sales revenues have decreased by 50% to 60% for many restaurants and eateries, retails stores and service-oriented businesses (e.g., hair salons ) thus affecting profitability and the ability to continue business operations.  In order to survive the slowdown, businesses must make some adjustments or risk going out of business.

As a consultant, which the Cost-Volume-Profit techniques and tools would you use to help these businesses make decisions? Assume the business is a restaurant. Briefly explain your choice(s).

Answer 1

Cost-volume-profit is a costing method used to assess the varying levels of cost and volumes with respect to operating profit, also know as break-even analysis. This generally helps during short term economic decision.

Break even = Fixed Cost/ Contribution Margin or sales - variable cost

For profitable business, this contribution margin exceed total fixed costs.

During economic downtime, the resturants should assess the contribution margin and at least try to recover the fixed cost to run and stay in business.