Gentle Lentil Case Solutions

Following information is provided in the case which will be used in following three solutions:

Seating Capacity of the restaurant = 50

Non-Labor fixed cost (per month) = $3,995
Variable cost of food (per meal) = $11

There are three uncertain variables that tend to dominate the Profit:

Number of meals sold (per month)

Fixed Labor cost (per month)
Revenue (per meal) follows a discrete distribution as below:

Scenario
Very Healthy Market
Healthy Market
Not so Healthy Market
Unhealthy Market

Price
$20
$18.50
$16.50
$15.00

Probability
0.25
0.35
0.30
0.10

Solution 1:
We need to run the simulation to find the expected salary of Sanjay at Gentle Lentil if he
doesnt consider the partnership scheme. Here,

Since, No. of meals sold and Revenue per meal are independent hence we can write:

Following is the Simulation result from @Risk which can be verified by analytical solution above
and it comes out to be fairly close:

The expected salary of Sanjay with no Partnership in Gentle Lentil Restaurant will be $10,873.76
with a standard deviation of $8,781.84. The 95% confidence interval is
.
Since, he is the owner so total revenue will be his earnings (Salary).

Expected Salary
Maximum Salary
Minimum Salary
P(Salary<5000)

Job in Consulting Firm

$6,666.67
$6,666.67
$6,666.67
0

Gentle Lentil Venture

$10,873.76
$43,958.63
- $11,106.77
27.4%

In the case study, we have been provided that from his Management job he can earn $80,000
annually or $6,666.67 per month. From simulation, we can see that through Gentle Lentil
venture he will be earning well above than $5000 which is the least amount he has to earn. But,
he also has to keep in mind that 27.4% times he is getting less than $5000 and 9.5% times he is
making a loss although simulation results show that there is 54.8% chance of getting revenue
more than $9000 which is quite good to go for. Also, there is a possibility of earning as high as
$43,000 a month. So, the risk appetite of Sanjay will play a key role in making the decision of
going with Gentle Lentil Venture or job with a Consultancy firm.

Solution 2:
Calculating the standard deviation of Sanjays salary analytically is very difficult as the function
of Salary is not linear in terms of two random variables Number of meals and Revenue per
meal. We were able to calculate it when calculating expectation using following result:

If

are independent random variables.

But we do not have any such simplified formula for calculating Standard deviation. Hence, we
have to approximate the standard deviation with the help of simulation.
From the simulation figure in solution 1, we found that the standard deviation of Sanjays Salary
with Gentle Lentil Venture without any partnership (calculated from simulation) is $8,781.84.

Solution 3:
Let us first simulate the case of Sanjay pursuing Gentle Lentil Venture in a partnership with his
Aunt. In the partnership Sanjays Aunt has offered the following Salary structure:
Scenario
Total Revenue < $3500
3500 < Total Revenue < 9000
Total Revenue> $9000

Sanjays Salary
$3500
Total Revenue
$9000 + 10% of (Total Revenue - 9000)

The expected salary if Sanjay opt for partnership with his Aunt is $7,736.23 and Standard
deviation is $2,731.85 with 95% confidence interval as (7566.89, 7905.57).
Although in this case, the expected salary and the maximum salary is less as compared to what
he was expecting if he doesnt go for partnership but now he is covered for losses and salary of
$3500 is guaranteed against 20.7% times going below $3500 without having partnership.

Expected Salary
Maximum Salary
Minimum Salary
P(Salary<3500)
P(Salary<5000)
P(Salary>9000)

Job in Consulting
Firm
$6,666.67
$6,666.67
$6,666.67
0
0
0

Gentle Lentil With

Partnership
$7,736.23
$12,387.03
$3,500
0
27.0%
56.5%

Gentle Lentil without

Partnership
$10,873.76
$43,958.63
- $11,106.77
20.7%
27.4%
54.8%

Following are the quantitative questions we would like to know before making any decision:
Without partnership

What is the probability of Sanjays salary falling below $5,000 (his threshold)
What is the probability of Sanjay making losses?
What will be the increment/decrement in Sanjays Salary after one year in consulting
firm?

With Partnership

What is the probability of Sanjays salary falling below $5,000 (his threshold)
What is the probability of Sanjay losing his potential high earnings (>$9,000)
To what extent are my losses contained with the partnership (Or, with what probability
will my earnings fall below $3,500, thereby invoking the partnership and safeguarding
me?)