1. Chipotle restaurants are divided into nine (9) regions and regional managers earn year-end bonuses based on...
Question:
1. Chipotle restaurants are divided into nine (9) regions and regional managers earn year-end bonuses based on the profitability of their regions. Included in General and Administrative expenses are $50 million of marketing expenses. Currently, the CFO allocates these marketing expenses to each region based on sales dollars generated. Thus, regions with higher sales are allocated more marketing costs. Assume you are a manager of a region that has an above average number of customers (when compared to other locations), and thus, sales for your location are above average. Also, assume that regional managers prefer more money to less.
a. Use the concepts of cost allocation and product cost subsidization to convince the CFO why you think marketing costs allocated to your region are too high. Do not merely provide a definition of cost allocation or product cost subsidization
b. Use the concept of relevant costs to convince the CFO that marketing expenses should not be allocated to any region to determine regional profitability, and therefore, bonuses. Do not merely provide a definition of relevant costs
2. Currently most Chipotle employees are paid a variable wage. More specifically, the number of hours restaurant staff work is related to the number of customers expected on a given day. There has been a recent push to have restaurants guarantee their workers a certain number of hours per week regardless of expected demand. Chipotle is considering doing this in an effort to reduce employee turnover and keep quality employees. The Company has determined that if they pay their workers a fixed wage then their labor costs would equal approximately $1.5 billion.
a. At what sales dollar level would Chipotle have preferred to pay its employees a fixed wage instead of a variable wage? Use 2017 data to determine your answer. Assume Chipotle wants to maximize profits.
3. In the upcoming year, Chipotle is considering replacing an old marketing campaign, which has had modest results in the past with a marketing campaign that costs the same but with a more robust impact on expected sales. Sales volume is projected to increase 3% as a result of the new marketing campaign. Use the operating leverage factor (OLF, your textbook calls this the degree of operating leverage) to forecast how much the dollar value of income from operations is projected to change if sales volume increases 3%. Assume no other changes to operations and that the 3% increase will not take the Company out of its relevant range.