MBA 6100 Case Study 1 Spring 2019 Block 2 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:
Cost of sales (all variable) $2,803,613
Gross Margin $2,052,788
Operating expenses: Variable $500,355
Total operating expenses: $884,970
Administative expenses (all fixed) $1,015,875
Net operating income $151,943
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 $40 respectively. Al Dente serves both lunch and dinner 300 days per year and serves twice as many lunches as dinners. As the MBA intern you are to prepare a managerial accounting focused report to the owners of Al Dente's Italian Restaurant, to include the following:
1. Prepare a contribution margin income statement using the given financial data. Use the following format:
Cost of sales Operating
Total variable costs
Total fixed costs
Net operating income
2. Compute the break-even volume of the number of lunches and dinners. Assume that the CM% for each meal category is the same as the average CM% as calculated in #1. Hint: To solve a break even sales mix, use the horizontal formula:
Net operating income = ($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 ‘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.