Question

6100 Case study Case #1

Sales $2,158,400 Cost of sales (all variable) $1,246,050 Gross Margin $912,350 Operating expenses: Variable $222,380 Fixed $170,940 Total operating expenses: $393,320 Administative expenses (all fixed) $451,500 Net operating income $67,530

The above income statement presents the sales, expenses and pre-tax operating income for a local eating facility. At this facility, the average meal cost for lunches and dinners are $20 and $40 respectively. This restaurant serves both lunch and dinner 300 days per year, and serves twice as many lunches as dinners. As the MBA intern working on assignment you are to prepare a managerial accounting focused report to the owners of the restaurant, to include the following: 1. Prepare a contribution margin income statement using the given financial data.

Sales Variable costs Cost of sales Operating Total variable costs Contribution margin Fixed costs Operating Administrative Total fixed costs Net operating income

Use the following format: 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 Sales $2,158,400 Cost of sales (all variable) $1,246,050 Gross Margin $912,350 Operating expenses: Variable $222,380 Fixed $170,940 Total operating expenses: $393,320 Administative expenses (all fixed) $451,500 Net operating income $67,530 Sales Variable costs Cost of sales Operating Total variable costs Contribution margin Fixed costs Operating Administrative Total fixed costs Net operating income 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.

Sales: per meal # of meals $ Total Dinner Lunch Total sales:

4. The owner of the restaurant is thinking of increasing sales through additional advertising, which she will incur as an administrative expense. The proposed additional advertising campaign will cost $25,000. She 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