Question

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: in an Excel Spreadsheet with Calculations and formulas shown

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.

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

Sales    (A) = $4,640,560

Variable costs

Cost of sales    (B) = $2,679,008

Operating (C) = $478,117

Total variable costs (D) = $3,157,125 [(B) + (C)]

Contribution margin (E) = $1,483,435 [(A) - (D)]

Fixed costs

Operating (F) = $367,521

Administrative (G) = $970,725

Total fixed costs (H) = $1,338,246 [(F) + (G)]

Net operating income = $145,189 [(E) - (H)]