Question

For nearly two years, Per has had a pizzeria where he has baked and sold luxury pizzas to the customers visiting his restaurant. The restaurant is decorated tastefully in classic Italian style. In the period, he has achieved a good reputation in the local area, and he has a stable customer base that visits the restaurant regularly. Today, a very critical situation for Per's Pizzeria has arisen. For the sake of public health, the authorities have imposed social distancing rules including the closure of all restaurants with immediate effect. However, it is possible for him to use the kitchen for production of food for take-away. Per has to consider how to handle this situation. His present business model with a restaurant, where customers are seated and being served at tables, has fallen apart with immediate effect. If he does nothing, he has zero DKK in turnover as from now on until the rules will be changed again. However, his costs do not disappear. The direct raw material costs for pizzas will disappear of course, if the production is stopped. He has sent the non-permanent staff working as waiters and dishwashers home, so this cost will also be discontinued. He is left with a labour cost for a permanently employed cook and a permanently employed waiter. Both have a term of notice of 1 month from the following first day in the month for dismissal. In practice it means that Per has to pay these two salaries for additionally 7 weeks at least. Both employees have accepted to take on work that is outside of their actual job description, if they can keep their job. Besides, there are fixed costs for rent, insurances etc. Based on the information Per has been able to get, he must expect to keep the restaurant closed for 6 weeks. Then he expects to be able to open again and continue his former business model.

Hi, I'm struggling with this management accounting question. Please help

Answer 1

Lockdown is situation where all the business got affected and now when this lockdown is unlocking people are learning a different way to run business. As government has given permission to restaurant like only take away is allowed. If this restriction is not imposed then people will gather and spread of virus got increased. This will also affect our customer, our employee and owner also.

a) Now here we will identify information which is relevant for decision making.

i) Fixed Cost:- This is cost which are going to happen though even restaurant is working or not or it is advisable for all type of organisation that to be situation of no profit and loss at least earn enough contribution to cover up fixed cost

In our case first we have to predict demand of pizza in market. If we are sure that we will earn enough contribution i.e (Sale-Variable cost) to reduce fixed cost loss then we have to open restaurant.

ii) As we have been only allowed takeaway we do not require any waiter employee we need is cook and dishwasher. As we have been provided with the information that we have two permanent employee one is cook and waiter and if we dismiss them we have to pay at least 7 week salary. Now we analysis the scenario if we dismiss them all 7 week salary is waste and we don’t even earn any money from them. And they both are ready to do work different from job description. So we have to approach both and describe their work like cook will cook pizza and that waiter have to support cook and also have wash the dishes.

iii) We should not hire any non-permanent employee right now as it will create crowd and we do not have that much demand as before.

iv) Now why we should open restaurant I have strong point which I explain with example.

Suppose fixed exp are as follows

Rent 50000, Insurance:- 10000, and that 7 week salary (If dismissed ) :- 50000

Sale price of pizza 350 and cost per pizza :- 180

Now we take two scenario if restaurant is opened or not open

	If restaurent is opened	If restaurent is not opened
Sale	280000	0
	(800*350)
Less :- Cost	180000	0
	(1000*180)
Contribution	100000	0
Less :- Fixed Cost
Rent	50000	50000
Insurance	10000	10000
Salary	50000	50000
Profit/ Loss	-10000	-110000

Now we are in loss but we steel tried to minimize our losses.

b) Factor that affect price of pizza

We have to earn that much contribution that we can recover our fixed cost.

Cost which affect our price is as follows.

As we are not hiring any temporary staff so the cost of that would be less but we have to cover our loss due to closure of our restaurant so it is not advisable to reduce price. But steel to cover our customer we should give them voucher if you visit next you will get this much of discount so this coupon will retain our customer also.

Another factor we have to consider is advertisement. After this diseases everyone is more concerned about hygiene so we have to advertise in such a manner that will trust of customer. This can be happen through digital marketing as we have business account so post on same or if we have details of our existing customer then try to approach the same.

Now this advertisement cost should also be recovered from customer also

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