Problem No. 2 options I. By improving purchasing and reducing portions, cutting
ID: 2438616 • Letter: P
Question
Problem No. 2 options I. By improving purchasing and reducing portions, cutting the food cost from 45% to 40% of food sales revenue. There would be no other changes. Cutting the food costs from 45% to 40% of food sales revenue and spending an additional S2,000 a month on advertising. It is estimated that the advertising would bring in extra customers and increase the volume of both food and beverage revenue by 20% over present levels. The extra customers would also incur extra costs over present levels as follows: 2. a. Wages b. Supplies800 c. Administration200 d. Repairs 30 e. Energy Costs100 $2,000 Using the schedule below prepare how both alternatives compare to the budgeted proposed for the current month and advise the owner of which alternative you consider the best and why.Explanation / Answer
Comparative Income Statement
Current month
Option 1
Option 2
Revenue
Food
$ 40,000.00
80%
$ 40,000.00
80%
$ 48,000.00
80%
Beverages
$ 10,000.00
20%
$ 10,000.00
20%
$ 12,000.00
20%
Total revenue
$ 50,000.00
100%
$ 50,000.00
100%
$ 60,000.00
100%
Cost of Sales
Food
$ 18,000.00
45%
$ 16,000.00
40%
$ 19,200.00
40%
Beverages
$ 3,000.00
30%
$ 3,000.00
30%
$ 3,600.00
30%
Total Cost of Sales
$ 21,000.00
42%
$ 19,000.00
38%
$ 22,800.00
38%
Gross profit
$ 29,000.00
58%
$ 31,000.00
62%
$ 37,200.00
62%
Total Payroll
$ 13,600.00
27%
$ 13,600.00
27%
$ 15,600.00
26%
Other Expenses
Operating supplies
$ 4,000.00
8%
$ 4,000.00
8%
$ 4,800.00
8%
Administrative and general
$ 2,600.00
5%
$ 2,600.00
5%
$ 2,800.00
5%
Advertising
$ 1,800.00
4%
$ 1,800.00
4%
$ 3,800.00
6%
Repairs and Maintenance
$ 900.00
2%
$ 900.00
2%
$ 1,200.00
2%
Utilities
$ 1,300.00
3%
$ 1,300.00
3%
$ 1,400.00
2%
Total Other Expenses
$ 10,600.00
21%
$ 10,600.00
21%
$ 14,000.00
23%
Net Income/(loss)
$ 4,800.00
10%
$ 6,800.00
14%
$ 7,600.00
13%
Option 2 gives a higher profit and should be perused.
Conclusion
Both the options gives higher net income than the current month but since option 2 gives more net income than option 1, It is beneficial to accept and execute Option 2 instead of option 1.
It is to be noted that Even though Net return on option 1 is 14% which is more than return on Option 2 that is 13%, still option 2 gives higher return as the relevant sales revenue is increased.
Comparative Income Statement
Current month
Option 1
Option 2
Revenue
Food
$ 40,000.00
80%
$ 40,000.00
80%
$ 48,000.00
80%
Beverages
$ 10,000.00
20%
$ 10,000.00
20%
$ 12,000.00
20%
Total revenue
$ 50,000.00
100%
$ 50,000.00
100%
$ 60,000.00
100%
Cost of Sales
Food
$ 18,000.00
45%
$ 16,000.00
40%
$ 19,200.00
40%
Beverages
$ 3,000.00
30%
$ 3,000.00
30%
$ 3,600.00
30%
Total Cost of Sales
$ 21,000.00
42%
$ 19,000.00
38%
$ 22,800.00
38%
Gross profit
$ 29,000.00
58%
$ 31,000.00
62%
$ 37,200.00
62%
Total Payroll
$ 13,600.00
27%
$ 13,600.00
27%
$ 15,600.00
26%
Other Expenses
Operating supplies
$ 4,000.00
8%
$ 4,000.00
8%
$ 4,800.00
8%
Administrative and general
$ 2,600.00
5%
$ 2,600.00
5%
$ 2,800.00
5%
Advertising
$ 1,800.00
4%
$ 1,800.00
4%
$ 3,800.00
6%
Repairs and Maintenance
$ 900.00
2%
$ 900.00
2%
$ 1,200.00
2%
Utilities
$ 1,300.00
3%
$ 1,300.00
3%
$ 1,400.00
2%
Total Other Expenses
$ 10,600.00
21%
$ 10,600.00
21%
$ 14,000.00
23%
Net Income/(loss)
$ 4,800.00
10%
$ 6,800.00
14%
$ 7,600.00
13%
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