A stand-alone restaurant’s is currently looking and improving its profitability

Question

A stand-alone restaurant’s is currently looking and improving its profitability and has two options:

Option No. 1: Improve purchasing and reduce portions. Food cost will go from the budgeted 45% of food revenue to 40% of food revenue. No other changes to any costs would be necessary.

Option No. 2: Cut the food costs from 45% of food revenue to 40% of food revenue. Beverage cost as a % of revenue stays the same. Spend an additional $2,000 a month on advertising. The increase in advertising would bring in extra customers and increase both food and beverage revenue by 20% each over the current budget levels. The extra revenue would mean some budgeted costs would increase as follows:

Wages              = $2,000

Supplies           =      800

Administration=      200

Repairs =       300

Energy Costs    =       100

Using the schedule below prepare how both alternatives compare to the budget proposed for the current month and advise the owner of which alternative you consider the best and why. Don’t forget to complete the vertical analysis.

Current Month Option 1 Option 2 Revenue: Food Beverage Total Revenue 40,000 10,000 50,000 80% 20% 100% Cost of Sales Food Beverage 18,000 3,000 21,000 45% 30% 42% Total Cost of Sales Gross Profit 29,000 58% Total Payroll 13,600 27% Other Expenses Operating Supplies Administrative & General Advertising Repairs & Maintenance Utilities 4,000 2,600 1,800 900 1,300 10,600 8% 5% 4% 2% 3% 21% Total Other Expenses Net Income/(Loss) 4,800 10%

Explanation / Answer

Budget Details Current Month % Option 1 %   Option 2 %   Revenue Food                     40,000 80%            40,000 80%             48,000 80% Beverages                       10,000 20%            10,000 20%             12,000 20% Total                     50,000 100%            50,000 100%             60,000 100% Cost Of Sales   Food                       18,000 45%            16,000 32%             19,200 32% Beverages                         3,000 30%               3,000 6%                3,600 6% Total Cost of Sales                     21,000 42%            19,000 38%             22,800 38% Gross Profit                     29,000 58%            31,000 62%             37,200 62% Total Payroll                     13,600 27%            13,600 27%             15,600 26% Other Expenses Operating Supplies                       4,000 8%               4,000 8%                4,800 8% Admin & Gen                       2,600 5%               2,600 5%                2,800 5% Advertising                       1,800 4%               1,800 4%                3,800 6% Repair & Maint                             900 2%                  900 2%                1,200 2% Utilities                       1,300 3%               1,300 3%                1,400 2% Total Other Expenses                     10,600 21%            10,600 21%             14,000 23% Net Income/(Loss)                       4,800 10%               6,800 14%                7,600 13% As the Option 2 is givivng highest net Income, the option 2 can be chosen.

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