Terry Shevlin recently opened Terry’s Pub in the University District. Because of licensing restrictions, the only liquor he can sell is beer. The average price of beer at Terry’s Pub is $5.00 per glass, and each glass costs Terry an average of $4.10. Terry has hired a bartender and waiter at $3,000 and $4,000 per month, respectively. His rent, utilities, and other fixed operating cost are $3,000 per month.
Terry is considering selling burgers during the lunch hour. He feels that this will increase his daytime business, which is currently quite small. It will also allow him to be more competitive with other local bars that offer a wider variety of food and beverages.
Terry would like to sell the burgers for $1.24 each in order to be attractive to customers. Terry will buy buns for $1.44 a dozen and other materials for $1.20 per pound. Each pound of other materials will make three burgers. Other ingredients will cost an average of $ .12 per burger. Terry will also need to hire a part-time cook at $1,200 per month. Other additional fixed costs will run about $360 a month.
a. If Terry sells only beer, how many glasses of beer does he have to sell each month to make a monthly profit of $500?
b. If Terry sells only beer, how many glasses of beer does he have to sell each month to make a monthly profit of 5% of sales?
c. Suppose Terry decides to add burgers to his menu. How many burgers does he need to sell to break even on the burgers? Assume that there is no effect on beer sales.
d. The main reason Terry wanted to add burgers was to attract more customers. Suppose that 3,000 extra customers per month came for lunch because of the availability of burgers and that each bought an average of 1 burger and 1.6 beers. Compute the added profit (or loss) generated by these extra customers.
e. Terry was not sure how many new customers would be attracted by the hamburgers. Give Terry some advice about how many new customers would be needed to just break even on the new business if each new customer bought one hamburger and one beer. Include an assessment of the consequences of volume falling below or above this break-even point.
f. Terry could offer a higher quality hamburger if he spends 50% more on the ingredients. He could then charge $2.24 for them. Explain how Terry could determine whether the higher quality hamburgers would be more profitable than the regular hamburgers.