A restaurant’s average monthly income statement is as follows:

The owner is considering two possible alternatives for the coming year:
■ Alternative 1: By improving purchasing and reducing portions, cutting the food cost from 42% to 37% food sales revenue. There would be no other changes.
■ Alternative 2: Cutting the food costs from 42% to 37% of food sales revenue and spending an additional $2,000 a month on advertising. It is estimated that the advertising would bring in extra customers and increase the volume of both food and beverage sales revenue by 20%
over current levels. The extra customers would also incur extra costs over current levels as follows:

Prepare budgeted average monthly income statements for both alternatives and advise the owner which alternative you consider the best, and why.LO1

Transcribed Image Text:

Sales Revenue Food sales revenue $40,000 Beverage sales revenue Total Sales Revenue 10,000 $50,000 Cost of Sales Food (42% of food revenue) $16,800 Beverage (30% of beverage revenue) 3,000 Total Cost of Sales (19,800) Gross Margin $30,200 Operating Expenses Wages expense $13,600 Operating supplies expense 4,000 Administration & general expense 2,600 Advertising & promotion expense 1,800 Repairs & maintenance expense 900 Utilities expense 1,300 Depreciation expense 700 Interest expense 600 Total Operating Expenses Operating Income (25,500) $ 4,700