Joe Bell recently opened Joe’s Pub in the university district. Because of licensing restrictions, the only liquor he can sell is beer. The average price of beer at Joe’s Pub is $3.00 per glass, and each glass costs Joe an average of $2.20. Joe has hired a bartender and waiter at $3,000 and $2,000 per month, respectively. His rent, utilities, and other fixed operating costs are $5,000 per month.
Joe is considering selling hamburgers 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 drinks.
Joe would like to sell the hamburgers for $1.25 each in order to be attractive to customers. Joe will buy buns for $1.20 a dozen and ground beef for $2.80 per kilogram. Each kilogram of ground beef will make 7 hamburgers. Other ingredients will cost an average of $0.20 per hamburger. Joe will also need to hire a part-time cook at $1,200 per month. Other additional fixed costs will run about $360 a month.

1. If Joe sells only beer, how many glasses of beer does he have to sell each month to make a monthly profit of $2,000?

2. If Joe sells only beer, how many glasses of beer does he have to sell each month to make a monthly profit of 5 percent of sales?

3. Suppose Joe decides to add hamburgers to his menu. How many hamburgers does he need to sell to break even on the hamburgers? Assume that there is no effect on beer sales.

4. The main reason Joe wanted to add hamburgers was to attract more customers. Suppose that 2,000 extra customers per month came forlunch because of the availability of hamburgers and that each bought an average of 1.5 beers. Compute the added profit (or loss) generated by these extra customers.

5. Joe was not sure how many new customers would be attracted by the hamburgers. Give Joe 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.

6. Joe could offer a higher quality hamburger if he spends 50 percent more on the ingredients. He could then charge $2.00 for them. Explain how Joe could determine whether the higher quality hamburgers would be more profitable than the regular hamburgers.