Question

bInterpret the vertical analysis. MAD 3-4 Analyze Chipotle Mexican Grill Chipotle Mexi an Gril, Inc. (CMG isa quick-service restaurant providing a focused menu of a. Prepare a vertical analysis of the incorme S Obj. 7 burrit os, tacos, and salads. Chipotle's income statements through operating income for two recent years are as follows (in thousands): Chipotle Mexican Grill, Inc. Income Statements For the Years Ended December 31 Year 1 Year 2 5 3.904.384 4.501.223 $ (1,365,580) (1,503,835) Expenses: Food, beverage, packing.. Labor.. Rent (occupancy) (1,105,001) (293,636) (641,953) 463,647 (1,045,726) (262,412) (514,963) (410.698) Other lotal expenses Operating income. $13.869812 $(3,737634) $34,567 $763,589 Prepare a vertical analysis of the two income statements. Round percentages to one deci- a. mal place. b. Interpret the vertical analysis.

Answer 1

Vertical Analysis

	Year 2	% of Revenues	Year 1	% of Revenues
Revenues	3,904,384	100	4,501,223	100
Expenses:
Food	1,365,580	35	1,503,835	33.4
Labor	1,105,001	28.3	1,045,726	23.2
Rent	293,636	7.5	262,412	5.8
General	641,953	16.4	514,963	11.4
Other	463,647	11.9	410,698	9.1
Total expenses	3,869,817	99.11	3,737,634	83
Operating income	34,567	0.89	763,589	17

Interpretation of vertical analysis

(i) Revenues have fallen in year 2 as compared to year 1.

(ii) Food expenses have decreased in absolute terms in year 2 as compared to year 1 but in terms of percentage of revenues, these have slightly increased.

(iii) All other expenses i.e. labor, rent, general and other expenses have increased in the year 2 both in absolute terms and in percentage terms. This increase in expenses is not justified on account of decrease in revenues in the year 2.

(iv) Total expenses were 83% of revenues in year 1 but these have jumped to 99.11% of revenues in year 2 which indicates that operating cost has increased very sharply in year 2.

(v) Operating income has fallen sharply from 17% in year 1 to 0.89% in year 2 which can be attributed to sharp increase in operating cost in year 2.

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