How would the breakeven sales of Cafe Edison, a New York City diner, have been affected by a rent increase?

Copyright: Moustyk / 123RF Stock Photo

Recently, several traditional New York City diners have closed, including Cafe Edison, La Parisienne, and Three Star. Real estate costs in New York City continue to increase, thus fueling rent hikes for small businesses like the Cafe Edison. The diner closures have been attributed to both rent hikes and a decline in the number of customers.

Let’s look at a hypothetical example using Cafe Edison.  Cafe Edison served a variety of traditional diner foods, including American, Polish, and European. It was located in an ornate former ballroom of the Edison Hotel in Midtown New York City, where it had operated for 34 years. It opened every day of the year between 5 – 8 am; it closed between 1 – 4 am, staying open an average of 21 hours per day.

Now assume that the average selling price of a menu item at Cafe Edison was $20.00 and that Cafe Edison’s cost of that item was $16.00. Also assume that before a rent increase of $18,000 per year, Cafe Edison’s fixed costs per month totaled $30,000.

Questions

1. How much, on average, did Cafe Edison make on a menu item?
2. How many menu items would Cafe Edison need to sell per month to cover its fixed costs before the rent increase? Per day (assume 30 days per month)? Per hour?
3. How many menu items would Cafe Edison need to sell per month to cover the rent increase itself? Per day (assume 30 days per month)? Per hour?
4. Would it have been realistic for Cafe Edison to continue operating once the rent increase took effect?

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions.

• Student handout (pdf) (word) (contains entire blog posting + discussion questions)
• PowerPoint file (brief article overview + discussion questions)

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