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Prof.B.D.Gupta
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Back-of-the-envelope calculation
Aback-of-the-envelope calculationis a roughcalculation,
typically jotted down on any availablescrap of paper such as the
actual back of an envelope.
It is more than a guess but less than anaccurate calculation or
mathematical proof.
Back-of-the-envelope calculation is often associated
with physicist Enrico Fermi. The most famous instance came
during the first atomic bomb test in New Mexico on July 16, 1945.
As
the blast wave reached him, Fermi dropped bits of paper. By
measuring the distance they were blown,he could compare to a
previously computed table and thus estimate the bomb energy yield.
Heestimated 10 kilotons of TNT; the measured result was 18.6.
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Back-of-the-envelope calculation
An informal mathematical computation, oftenperformed on a scrap
of paper such as an envelope.
A back-of-the-envelope calculation uses estimatedand/or rounded
numbers to quickly develop aballpark figure.
The result should be more accurate than a guess,but will be less
accurate than a formal calculation
performed using precise numbers and a spreadsheet
orcalculator.
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Back-of-the-envelope calculation
How much water flows out of the Ganges River in aday?'
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Case : McDonalds In India, McDonald's is a joint-venture
company
managed by two Indians.
While Amit Jatia, M.D. Hardcastle Restaurants Pvt.Ltd. owns and
spearheads McDonalds in west & southIndia,
McDonald's restaurants in North & East India are
owned and managed by Vikram Bakshi's ConnaughtPlaza Restaurants
Private Limited.
What is the yearly turn over and profit ofMcDonalds, Mani
Square?
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Case : McDonalds
ANNUAL REVENUE = NUMBER OF EMPLOYEES XRs. 100,000.
Which factors need to be known before a revenuestream for a
restaurant business can be determined?
1.Capacity
2.Utilization
3.Price or Average Ticket ( Bill) value
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Case : McDonalds 1.Capacity :
For restaurants it is seats capacity per year
Assuming McD has 50 seats. McDs seating capacity : No. of seats
x 360 days
50 x 360 = 18,000
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2.Occupancy rates
Seats occupied
Occupancy rate = ----------------------- x 100Seats
available
For McD, assume 25 seats will be occupied by guestseach day of
the year.
Occupancy rate = {25/ 50} x 100 = 50%
So, McD will have an annual seat occupancy rate of50% i.e., 9000
seats per year.
Calculate utilization
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Case : McDonalds 1.Capacity : 50
2.Capacity Utilization : 50% i.e., 9000 seats per year
3.Price ( Average bill value) : Rs.200 per seat
4.Annual Revenue : 9000 x 200 = 18,00,000.-
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Case : McDonalds Cost calculation:
1. Salary
2. Raw material cost3. Rent
4. Electricity, service, maintenance
5. Depreciation
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Case : McDonalds Cost
Salary = Rs. 6,00,000
Raw material cost =Rs.1,80,000
Rent = Rs.6,00,000
Electricity, maintenance= Rs.60,000
Depreciation @ 5% on kitchen equipment, furniture,
valued at Rs.25 lacs = Rs.1,25,000 Total cost = Rs.
15,65,000.
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Case : McDonalds Profit
Annual Revenue : 9000 x 200 = Rs. 18,00,000.-
Expected take away revenue Rs. 5,00,000.- Total revenue Rs.
23,00,000
Total cost Rs. 15,65,000.-
Gross Profit Rs. 7,35,000.-
Income tax @ 30 % Rs,2,20,500.-
Net profit Rs. 5,14,500.
ROI: Net Profit / Investment = (5,14,500 / 25,00,000 )
x100 = 20 %
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Thank You
