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Question 13 BUTTERY RESTAURANT
(a) The current average weekly trading results of the Buttery Restaurant are shown below.
$ $ Revenue 2,800
Operating costs: Materials 1,540
Power 280 Staff 340 Building occupancy costs 460 ——– TOTAL COSTS (2,620) ——– Profit 180
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REVISION QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
©2012 DeVry/Becker Educational Development Corp. All rights reserved. 13
The average selling price of each meal is $4. Materials and power may be regarded as a
variable cost varying with the number of meals provided. Staff costs are semi-variable with a
fixed cost element of $200 per week. The building occupancy costs are all fixed.
Required:
Calculate the number of meals that must be sold in order to earn a profit of $300 per
week.(4 marks)
(b) The owners of the restaurant are considering expanding their business and using under utilised space by diversifying into:
either (1) take-away food;
or (2) high quality meals.
The estimated sales and costs of each proposal are shown below:
Take-away Quality meals Sales volume per week 720 meals 200 meals
$ $ Average selling price per meal 1.60 6.00
Variable costs per meal 0.85 4.66
Incremental fixed costs per week 610.00 282.00
The sales estimate for both of the above proposals is rather uncertain and it is recognised that
actual sales volume could be up to 20% either higher or lower than that estimated.
If either of the above proposals were implemented it has been estimated that the existing
restaurant’s operations would be affected as follows:
(1) As a result of bulk purchasing material costs incurred would be reduced by 10 cents
per meal. This saving would apply to all meals produced in the existing restaurant.
(2) Because more people would be aware of the existence of the restaurant it is
estimated that Revenue would increase. If the “take-away food” section were
opened, then for every ten take-away meals sold the existing restaurant’s sales
would increase by one meal; alternatively, if the “high quality meals” section were
open, then for every five such meals sold the existing restaurant’s sales would
increase by one meal.
A specific effect of implementing the “take-away food” proposal would be a change
in the terms of employment of the staff in the existing restaurant, the result of which
would be that the staff wage of $340 per week would have to be regarded as a fixed
cost.
Required:
Calculate, for each of the proposed methods of diversification:
(i) the additional profit that would be earned by the owners of the restaurant if
the estimated sales were achieved(8 marks)
(ii) the sales volume at which the owners of the restaurant would earn no
additional profit from the proposed diversification.(3 marks)
(15 marks)HOW DO WE DO PART B (I) AND (II)?
PLEASE REPLY.
This is for the portion of the question that involves: Calculate the number of meals that must be sold in order to earn a profit of $300 per week.(4 marks).
Answer:
a. no of meals that must be sold to earn $300 per week.
Total variable costs: $1540 (Materials) + $280 (Power) + $140 (variable component of staff costs) = $1960
Total fixed costs: $200 (fixed component of staff costs) + $460 (Building occupancy costs) = $660
Total Revenue: $2800
Profit per week: $180
Contribution margin: $840 ($2800 – $1960)
Unit selling price per meal: $4
Total revenue = Unit selling price x no. of units of meals sold per week
d/4, $2800 = $4 * x
x = $2800/$4 = 700 meals sold per week.
Unit variable cost = Total variable cost/no of meals sold per week = $1960/700 = $2.8
Unit contribution margin = unit selling price – unit variable cost = $4 – $2.8 = $1.2
Targeted net profit: $300
To calculate no. of meals per week for the restaurant to reach its target, using CVP:
(Fixed expenses + target net profit)/unit contribution margin = target no of meals per week for $300 revenue to be reached.
($660 + $300)/$1.2 = 800 meals per week for target profit of $300To understand B, you have to realize that whatever option is chosen, the restaurant’s owners are venturing into a different area of operations that is separate and distinct from the Regular operations.
BI: (i) the additional profit that would be earned by the owners of the restaurant if the estimated sales were achieved(8 marks).
Let’s draw up a contribution income statement under the assumption that take-away option was chosen.
First, a contribution income statement for the Regular operations net Take-away foods operations.
Assumption: For every 10 take away meals sold, 1 more Regular meal will be sold.
720 take-away meals were estimated, therefore, the increase in regular meals = 72
Total sales, Regular meals = 700 (before diversification; see above) + 72 (increase in sales) = 772 meals per week.
Unit price of Regular meals = $4
Total revenue from regular meals = unit price * sales volume = $4 * 772 = $3088
Variable costs:
Materials: under the planned diversification, it was estimated that due to bulk buying material costs would be reduced by $0.1 for every meal. Therefore, material costs will reduce by $77.2 ($0.1 * 772 meals). Total material costs = $1540 – $77.2 = $1462.8
Total variable costs = $1462.8 (material costs) + $280 (Power) = $1742.8
Contribution margin = Revenue – Total variable costs = $3088 – $1742.8 = $1345.2
Fixed costs:
Staff: staff costs are now fixed costs= $340
Total fixed costs = $340 (staff costs) + $460 (Building occupancy costs) = $800
Profit = Contribution margin – total fixed costs = $1345.2 – $800 = $545.2
Regular profits = $545.2The operations for take-away foods is a different arm in the restaurant. Therefore, we calculate the profit from that operation using the estimates given.
Estimated Revenue = estimated sales volume * estimated unit price = 720 * $1.6 = $1152
Estimated variable cost = estimated sales volume * unit variable costs = 720 * $0.85 = $612
Estimated contribution margin = Estimated revenue – estimated variable costs = $1152 – $612 = $540
Estimated Fixed costs = incremental fixed costs = $610
Profit (loss) = Estimated contribution margin – estimated fixed costs = $540 – $610 = ($70)
You can see that the take-away arm runs at a loss. But the restaurant has net positive gain by diversifying:
Gain (loss) from diversification into take-away meals = Revenue from regular meals + revenue from diversification = $545.2 + ($70) = $475.2 gain under diversification.
Now, what is the additional profit? This is the profit per week after diversification less the profit per week before diversification.
Profit per week after diversification = $475.2
Profit per week before diversification = $180 (see above)
Additional profit = $475.2 – $180 = $295.2 (164% increase in profits per week)
follow the same steps in calculating the additional profit from diversification under quality mealsnow for BII: (ii) the sales volume at which the owners of the restaurant would earn no additional profit (or break-even point) from the proposed diversification.(3 marks)
We’ll use the sales mix between the two meals, take-away and regular to calculate the break-even point.
Sales volume, take-away = 720 meals
Sales volume, regular = 772 meals.
Therefore, the sales mix in meals is: 48% of take-away meals to 52% of regular meals.
unit price, take-away meal = $1.6
Unit price, regular = $4
Since we have two distinct meals here, we will use weighted-average unit contribution margins.
weighted-average unit contribution margins = ($1.6 * 720) + ($4 * 772) = $5.968 = $5.97
Fixed costs = fixed costs for regular meals + fixed costs for take-away meals (or incremental fixed costs) = $800 + $610 = $1410
Break-even point = fixed costs / weighted-average unit contribution margin = $1410/$5.968 = 236.26 meals per week.
This number of meals is allocated between take-away and regular meals according to their sales mix.
Break-even point, take-away meals = 48% of 236.26 = 113.4 meals = 113 meals per week.
Break-even point, regular meals = 52% of 236.26 = 122.86 meals = 123 meals.Point to note: Using economies of scale, the restaurant could achieve its aim of $300 per week by diversifying into take-away meals, this at a lower cost, and since regular meals are highly priced, known and more expensive, in totality, there is a possibility that the increase in revenue would be much more than anticipated.
<cite> @nnaemeka said:</cite>
now for BII: (ii) the sales volume at which the owners of the restaurant would earn no additional profit (or break-even point) from the proposed diversification.(3 marks)
We’ll use the sales mix between the two meals, take-away and regular to calculate the break-even point.
Sales volume, take-away = 720 meals
Sales volume, regular = 772 meals.
Therefore, the sales mix in meals is: 48% of take-away meals to 52% of regular meals.Downwards from here is wrong in my earlier reply. I realized it this afternoon while reflecting on the huge operating leverage that was calculated, so i came to review it. Just follow up from above and make adjustments from here.
unit price, take-away meal = $1.6
Unit variable cost, take-away meal = $0.85
unit contribution margin = $1.6 – $0.85 = $0.75 {I failed to calculate this but used the price for UCM}
Unit price, regular = $4
Unit Variable cost, regular meal = $2.8
Unit contribution margin, regular meal = $1.2 {I failed to calculate this but used the price for UCM}
Since we have two distinct meals here, we will use weighted-average unit contribution margins.
weighted-average unit contribution margins = ($0.75 * 48%) + ($1.2 * 52%) = $0.36 + $0.624 = $0.984
Fixed costs = fixed costs for regular meals + fixed costs for take-away meals (or incremental fixed costs) = $800 + $610 = $1410
Break-even point = fixed costs / weighted-average unit contribution margin = $1410/$0.984 = 1432.93 meals per week.
This number of meals is allocated between take-away and regular meals according to their sales mix.
Break-even point, take-away meals = 48% of 1432.93 = 688 meals per week.
Break-even point, regular meals = 52% of 1432.93 = 745 meals per weekLet us verify the break-even point calculation through an income statement
Sales revenue:
Take-away meals = 688 * $1.6 = $1100.8
Regular meals = 745 * $4 = $2980
Total revenue = $1100.8 + $2980 = $4080.8
variable costs = ($2.8 * 745){regular} + ($0.85 * 688) {estimated take-away} = 2086 + 584.8 = $2670.8 {understand the logic? The variable costs on the break-even quantity!}
Contribution margin = $4080.8 – $2670.8 = $1410
Profit = contribution margin – fixed costs = $1410 – $1410 = $0 {proved}
Contribution margin =
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