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    Costs, Revenue and Break even

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    The Lottery has arrived in North Carolina. Your client has a novel idea of combining pizza sales with lottery ticket sales. You have been employed as a management consultant to recommend "for or against" the Lotto Pizza project. You have been asked to develop a business plan around your recommendation in rural eastern Johnston County, North Carolina. The major question is fairly simple - what type of pizza service (delivery only or dine-in only) should be provided and when will the client break even on this service.

    Costs associated with the pizza restaurant will vary with the type (delivery only or dine-in only).

    Labor Per Week: All employees hired by Lotto Pizza in the restaurant operation will work for 40 hours per week, at a rate of $7.00 per hour. Restaurant will not be open on Sunday.

    Real Estate: Lotto Pizza will expense their real estate with a bank loan. Building cost will be approximately $80 per square foot. The lot price will vary with the type of restaurant. Finance the restaurant and the lot at 7% interest with a 15-year loan.

    Special Equipment: Ovens will be required for both types of restaurants; however, the dine-in will require more furniture. Assume that the money for the equipment will also be borrowed "up front." The interest on the equipment will be 7.5% for a 10-year loan.

    Insurance & Trash Removal: Insurance and monthly trash removal rates will be higher for the dine-in establishment.

    Lottery Ticket: The ticket will be automatically purchased and provided to the customer after the customer purchases 10 pizzas. The customer's master number will be "played" with the delivery or order of the tenth pizza. Assume the ticket will cost Lotto Pizza one dollar.

    The following table contains information to calculate the "start up costs." (See attached)

    * Five of every 10 eat-in pizzas will ask for a to-go box.

    The pizzas will sell for a flat rate of $13.00. As shown in the above table, the delivery persons will work on a straight commission of $2.00 per pizza. They will not be employees and enter into the model at the $7.00 per hour. If you chose the dine-in only, no delivery persons will be needed. For each dine-in pizza we assume that two drinks, one salad, and one desert are purchased (drink price = $1.95 each, salad price = $2.95, desert price=$3.95).

    1) Calculate the fixed and variable costs for the two restaurant options on a per pizza basis.
    2) Calculate a "per pizza" revenue (include drinks, etc that go with a pizza) for each restaurant option.
    3) Generate the number of pizzas that will need to be sold on a daily basis to break even in these two scenarios (delivery and dine-in). Is there a meaningful difference in the numbers?

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    Solution Summary

    The solution shows computation of fixed cost, variable costs, revenue and Break even point.