Question

Gilman's Café is a popular restaurant in a local tourist town. Sarah Gilman, who opened the restaurant five years ago, has seen it grow steadily. Currently, Gilman's is only open for dinner, but many of her regular customers have been asking Sarah to consider opening for lunch as well. Sarah has been talking to her accountant about the financial impact of the expanded services on the overall business. She knew that the café did not make much money and she was concerned that the new business might be too risky. The accountant asked her for her best estimates on the impact of the new business on revenues and costs. She had been thinking about this for some time and estimates that revenues would grow by about 25 percent. Food costs would increase by about 40 percent and labor costs by about 20 percent. Her rent would not change, but utilities would increase by about 25 percent. Other costs would increase by 15 percent. The salary she pays herself as manager of the café would not change. A few days later, her accountant stops by with the following estimated income statement assuming she adds the lunch business. Required: a-1. Prepare an income statement. a-2. Based on the financial impact, should Sarah open the café for lunch? b. Are there other factors she should consider?

Answer 1

(a) 1 Income Statement:-

Particulars	Lunch & Dinner Services	Growth in %	Dinner Services Only	Computation
Sales Revenue	$891000	25	$712800	(891000/ 125%)
Cost
Food Costs	301000	40	215000	(301000/140%)
Labour	267000	20	222500	(267000/120%)
Rent	96000	-	96000	-
Utilities	60000	25	48000	(60000/125%)
Other Costs	42550	15	37000	(42550/115%)
Manager's Salary	90000	-	90000	-
Total Costs	$856550		$708500
Operating Profit(Loss)	$34450		$4300

(a) 2 Decision based on financial impact :-

Sarah should open the cafe for lunch as this will increase the operating profit of cafe from $4300 to $34450 i. e. by $30150. So the answer is YES.

(b) Other factors to be considered:-

What other restaurants might do

Competitor's strategy is also an important factor.

Whether the longer opening hours might cause the restaurant to lose its appeal

As the restaurant is popular for its Dinner services and it is open for only some limited hours which differentiate and standardise it from the other restaurants, some customers may not like the longer opening because it will affect the quality of service provided by the restaurant.

Whether this will lead to enhancement of storage facility

As the Cafe would be providing Lunch facility along with the Dinner facility, it would be using more of resources then earlier which will lead to the requirement of  additional storage facility.

Whether the longer opening hours might cause the restaurant to recruit additional staff

For providing additional services the restaurant will need additional staff to perform additional tasks because the currant staff would be insufficient. This will lead to additional cost of salary to the new staff recruited.