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 $4,640,560
Cost of sales (all variable) $2,679,008
Gross Margin $1,961,553
Operating expenses:
Variable $478,117
Fixed $367,521
Total operating expenses: $845,638
Administative expenses (all fixed) $970,725
Net operating income $145,190
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.
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.
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 ‘whatif’,
compare the additional contribution margin impact on NOI given the change in units and
change in fixed costs.

Answer 1

1. Contribution margin income statement % to sales 4640560 58% 10% Sales Variable costs Cost of sales Operating Total variable costs Contribution margin Fixed costs Operating Administrative Total fixed costs Net operating income 2679008 478117 3157125 1483436 68% 32% 367521 970725 1338246 145190

2. At breakeven, CM = Fixed Cost Therefore, CM = $ 1338246 Assuming the CM% for each meal category is the same as the average CM% as calculated above Let X be the number of dinners, 2x the number of lunches ( 40*x + 20* 2x )* .319667 = Fixed Cost = 1338246 25.5734x = 1338246 x = 52329.62 x=52330 Rounding off 2x = 104659 Rounding off No. of Lunches at Break Even No. of Dinner at Break Even 104659 52330

3. Contribution margin income statement at Breakeven Lunch 104659 20 2093180 Dinner 52330 40 2093190 (There is a Difference of $10 because of Rounding off) Number of meals Cost per meal Sales Variable costs Cost of sales Operating Total variable costs Contribution margin 1208399 1208404 215660 215661 1424059 1424065 (Multiply sales with Variable cost % obtained above) 669121 669125 (Multiply sales with CM% obtained above) 1338246 Total Contribution Fixed costs Operating Administrative Total fixed costs Net operating income 367521 970725 1338246

4. Additional Contribution margin income statement Lunch Dinner 300 1800 300 900 40 36000 36000 Number of Additional meals daily No of days Total No. of Meals annualy Cost per meal Additional Sales Additional Variable costs Additional Cost of sales Additional Operating Additional Total variable costs Additional Contribution margin 20783 3709 24492 11508 20783 3709 24492 (Multiply sales with Variable cost % obtained above) 11508 (Multiply sales with CM% obtained above) 23016 Additional Total Contribution Additional Fixed costs Additional Operating Additional Administrative Additional Total fixed costs Additional Net operating income 25000 25000 -1984

As per the policy, first four questions have been answered.