Question

To set up a new restaurant, Jesse has to obtain a bank loan of $1,500,000. Jesse requires a 30% rate of return and has estimated that the restaurant will provide 180,000 meals during the year with an average cost of $20. Jamie also estimated that selling and administrative (S&A) expenses would be $450,000.

Determine the markup percent for Jesse’s restaurant.

Answer 1

To find the markup percent for Jesse's restaurant, calculate the desired profit by adding the 30% return on the loan to the total cost (cost of meals + S&A expenses), and then divide by the total cost. Multiply the result by 100 to get the markup percent, which is 11.11%.

Step-by-step explanation:

To determine the markup percent for Jesse's restaurant, we must calculate the desired profit and then use that figure to find the markup on cost. First, we will calculate the total cost and then add Jesse's required rate of return to obtain the total revenue needed.

The total cost consists of the cost to provide the meals and the S&A expenses. The cost to provide the meals is found by multiplying the number of meals (180,000) by the average cost per meal ($20), resulting in $3,600,000. Adding the S&A expenses of $450,000 gives a total cost of $4,050,000. Jesse requires a 30% rate of return on the loan of $1,500,000, which amounts to $450,000 ($1,500,000 * 0.30). Therefore, the total revenue needed is $4,500,000 ($4,050,000 total cost + $450,000 return on loan).

Now, the markup on costs can be calculated by dividing the required profit by the total cost and then converting it into a percentage:

1. Calculate desired profit by subtracting the total cost from the total revenue: $4,500,000 (total revenue) - $4,050,000 (total cost) = $450,000 (desired profit).
2. Divide desired profit by the total cost: $450,000 / $4,050,000 = 0.1111.
3. Convert to a percentage by multiplying by 100: 0.1111 * 100 = 11.11%.

Therefore, Jesse's restaurant should apply a markup percent of 11.11% to achieve the desired 30% rate of return.