Question

MBA 6100 Case Study 1 Spring 2019 Block 2 As a recently hired MBA intern, you are working in a consulting capacity to provide an analysis for Al Dente's Italian Restaurant. A financial income Statement is presented below:

Sales $4,856,400

Cost of sales (all variable) $2,803,613

Gross Margin $2,052,788

Operating expenses: Variable $500,355

Fixed $384,615

Total operating expenses: $884,970

Administative expenses (all fixed) $1,015,875

Net operating income $151,943

This income statement presents the sales, expenses and pre-tax operating income for a local eating facility. At Al Dente, the average meal cost for lunches and dinners are $20 and $40 respectively. Al Dente serves both lunch and dinner 300 days per year and serves twice as many lunches as dinners. As the MBA intern you are to prepare a managerial accounting focused report to the owners of Al Dente's Italian Restaurant, to include the following:

1. Prepare a contribution margin income statement using the given financial data. Use the following format:

Sales

Variable costs

Cost of sales Operating

Total variable costs

Contribution margin

Fixed costs

Operating Administrative

Total fixed costs

Net operating income

2. Compute the break-even volume of the number of lunches and dinners. Assume that the CM% for each meal category is the same as the average CM% as calculated in #1. Hint: To solve a break even sales mix, use the horizontal formula:

Net operating income = ($Sales – $Variable costs) – $fixed costs

Net operating income = $CM – $fixed costs

At Breakeven, NOI = $0

Therefore, $CM = $ Fixed costs

Now solve for the unit $CM for each item. Let X be the number of dinners, 2X the number of lunches. $CM is the combined total of the $CM for dinners, and the

$CM for lunches.

3. Using the CM income statement format, verify that your calculated break-even volume for lunches and dinners results in a NOI of zero (hint: in your prepared CM statement from #1, breakout the Sales dollars into subcategories lunch and dinner as shown below, using the values of X for in the # of meals cells). Present the entire CM statement at the BE level.

4. The owner of the restaurant is thinking of increasing sales through additional advertising, which he will incur as an administrative expense. The proposed additional advertising campaign will cost $25,000. He anticipates that the additional advertising expense will result in an additional 6 lunches and 3 dinners on average, per day. Illustrate the impact on NOI assuming the changes above (hint: show a revised CM statement). Hint: for this type of ‘what-if’, compare the additional contribution margin impact on NOI given the change in units and change in fixed costs.

5. In order to increase NOI, the owner of the restaurant is considering adjustments to the quality of food ingredients currently used. Rather than using premium ingredients, use of average quality ingredients would reduce the cost of food by 15%. The owner proposes to not change the current meal pricing. As the consultant, prepare a memo to the owner that presents the pros and cons of this change in operations. What are the potential impacts on revenue, costs, and net operating income may result from this change? The owner does not want to see a decrease in net operating income. Could the owner make this change and absorb a decrease in customers, and how would you demonstrate numerically to support your analysis? What other factors or consequences of this decision should the owner consider besides the financial impact of the change?

Hint: this qualitative analysis is to be thorough. Expect to present 400 words or so, and support your analysis using calculated or given accounting data.

Answer 1

The solutions to first 4 sub parts are given below

1) The contribution margin statement is as follows -

Particulars	Sub Total	Total
Sales		4,856,400
Variable Costs	2,803,613
Cost of Sales Operating	500,355
Total Variable Costs		3,303,968
Contribution Margin		1,552,432
Fixed Costs	384,615
Administrative Costs	1,015,875
Total Fixed Costs		1,400,490
Net Operating Income		151,942

Contribution Margin % = 1,552,432/ 4,856,400 = 32%

2)

Let x be contribution per meal, then total contribution per day will be = 2x (lunch) + x (dinner) = 3x

Total Contribution per year = 300 days * 3x = 900x

Since at break even, Fixed Costs = Contribution Margin; So to break even, we should earn a contribution margin of 1,400,490

900x = 1,400,490

x = 1,556

	Lunch	Dinner
	2x	x
Contribution	3,112	1,556
Contribution %	32%	32%
Sales = Contribution/32%	9,725	4,863
Cost per meal	20	40
No of meals to breakeven	485	122

3) Contribution Margin Statement at Break even -

Particulars	No of meals	Cost per meal	Total
Lunch	485	20	9,700
Dinner	122	40	4,880
Total Sales per day			14,580
Total days			300
Total annual sales			4,374,000
Contribution Margin		32%	1,399,680
Fixed Costs		384,615
Administrative Costs		1,015,875
Total Fixed Costs			1,400,490
Net Operating Income			(810)

4) With the additional sales and advertisement expenses the incremental impact on net operating income is

Particulars		Amount
Lunch [6*300] *20	1,800	36,000
Dinner [3*300] *40	900	36,000
Total Additional Sales		72,000
Additional Contribution @ 32%		23,040
Additional Advertising Costs		(25,000)
Reduction in Net Operating Income		(1,960)