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Sandwich queen is looking to expand its restaurant facilities to increase its seating capacity a further 40%. results for the current year are as follows.
000
food sales 200
drink sales 170
equals 370food costs 145
drink costs 77
staff costs 40
other costs 20equals 282
cash flow equals 88
sales and variable costs will increase in line with the seating capacity increase. the other costs are 40 percent fixed. an extra employee will be required to serve the extra seating capacity. there are currently 4 employees on an equal wage.
what is the relevant annual net cash flow to the nearest 000 of the proposed expansion.Sir one confusion in this question, the answer specified in the book, multiplies other costs with 60% at the same time multiplying with 40%, which gives us the answer “5”, what I don’t get is, why aren’t we separating the costs? Because fixed doesn’t changes with the activity, we could’ve done it like this
20×40%= 8 fixed cost
Variable= 20×60%×40%=5 because it says variable cost increases with capacity
Please correct me where am i doing wrong
I am not sure I understand you because it seems as though you are arriving at the same answer as in your book (and how you get to the answer is irrelevant in the exam).
Sir I’m confused about the figures being used for other costs, because it says other costs are 40% fixed, while in the answer specified
Other costs: 20×60%×40%=5
I don’t understand what % does 40 relates to i mean is it % of fixed cost because it says other costs are 40% fixed or is that % of increasing capacity since they’re multiplying with 60% which is variable cost and they increase in line with the seating capacity increase
60% of the other costs are variable.
This variable amount will increase by 40% because the seating capacity increases by 40% and the variable costs increase in line with the increase in seating capacity.
Yes sir so simply we are not including fixed cost % for other costs, i misinterpreted those 40% as fixed cost %, because it says in the question other costs are 40% fixed, thankyou sir!
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