2014 AICPA Accounting CompetitionManagement AccountingAll characters and company information and names in this case document are fictitious. Any resemblance to real persons, living or dead, or companies is purely coincidental.Stage ThreeThe Humble Piesmanagement team was once again impressed with your teamsrecommendations on theinvestment opportunities. For various reasons, the company decided to invest in the new labeling machine and not pursue the national fast food chain RFP. However,since receiving your recommendations, the company has been conducting strategic planning discussionson the future of Humble Pies and is considering two major acquisitions.Option 1Purchase Petes Steakhouse. Up to now, Humble Pieshas focused on selling pies as a wholesaler to restaurants and grocery store chains in the mid-Atlantic region. Linda and Taylor were approached by the chains management group about whether they would be interested in buying their five underperforming restaurants and operate them under the L&Ts Steakhouse name. Petes Steakhouse is known forits excellent steak dinners and service but has struggled to expand its menu to compete with the many dining options available to consumers in the mid-Atlantic region (primarily, the Carolinas and Virginia). Thekeyidea with this acquisition is that adding Humble Pies outstanding dessert offerings would make the new restaurant an appealing destination for both dinner and dessert. To help prepare for the upcominginitial negotiations, Lindaand Taylor have asked you to review the 2013performance reportfor the chain (see Table 2). It is estimated that average price per meal would increase 12% with the new desserts and require an investment of $10 million.Option 2The second option is to purchase and operate a factory in Knoxville, Tennessee which would double Humble Piescurrent production volume. There is an existing food production facility in Knoxville in a location that is well positioned on distribution routes and provides proximity to a whole new market of restaurants and grocery chains. The asking price for the factory is $7.5 million and includes existing equipment. About half the machinery could be used by Humble Pies,but would also require an investment of $2.5 million in additional equipment with a 10-year average life to provide the same capacity as the currentfactory. It would take about sixmonths to get the new plant up and running. Estimated sales for the first three years after it opens are $4 million, $6 millionand $10 million, respectively. Variable expenses are expected to have about the same behaviorand relationship to sales as the current facility. Fixed expenses would be about the same amount per month as the current factory.

Table 2:Petes Steak House2012-2013 Performance Report2013 Actual2012 Actual Customer Volume1,066,0001,105,000Net Sales$10,523,440$10,508,520Cost of Sales:Food$6,340,206$6,362,772Total Labor$995,160$1,000,480Cost of Sales$7,335,366$7,363,252Gross Profit$3,188,074$3,145,268Other Operating Expenses:$2,270,665$2,222,835Operating Profit$917,409 $922,433 Other Data:Average Operating Assets$7,500,000$7,500,000Food Costs: % variable100%100%Total Labor Costs: % variable 70%70%Other Op. Expenses: % variable60%60%Your teams assignmentHumble Pies will be hearing recommendations from you and two other teams in just a few weeks inWashington, D.C. Only the best of the best made it this far, so make sure you dress like you mean business(that means a full suit). Humble Pies management wants to get to know each member of your team, so you should eachparticipate equally.Use the following as a guide when making your recommendations:1.Assess performance for Petes Steakhouse in terms of expected return on investment (ROI) and residual income. What were the major factors that contributed to the difference between profitsfrom 2012 to 2013?What does this analysis suggest for Humble Pies?2.Assess the viability and profitability for the Knoxville factory including its expected ROI and residual income. What does this analysis suggest for Humble Pies?3.Comment on the strategic, technical, behavioraland risk factors that are relevant to this decision. What does this analysis suggest for Humble Pies?4.What action do you recommend for Humble Pies at this time?Each team will give a 10-minute presentation to our esteemedjudges, followed by no more than 10 minutes of Q&A.And if you stand out as the best, youll be taking home first place. Get working! Well see you on December 19.