7.

Consider the following information in answering the next questions. Schlotzsky's, an Austin-based upscale sandwich restaurant, has recently released financial information relating to franchise store opportunities.' The estimated fixed acquisition cost of the franchise would be $300,000. The franchise acquisition will be depreciated on a straight-line basis over ten years. The following revenue and expense estimates for a new franchise store, annually would be: in $000s Sales 1,500 Ingredients 375 Crew Labor (hourly) 345 Management and Other Store Overhead Costs (fixed) 195 Selling, General and Administrative Costs(fixed) 255 Product Discounts (variable in proportion to Sales) 60 Although not mentioned at the Schlotzskys website, it is generally known that Schlotzskys charges a franchise royalty fee (which represents a cost in addition to the costs listed above) on a negotiated basis. On average, in the past, the fee has been 5% of sales over and above the breakeven sales, but it can vary depending on negotiations between Schlotzskys and the franchisee. A typical Schlotzsky's store has on average 55 employees and about 3,700 square feet of floor space. In the most recent Austin Chronicle readers' poll Schlotzskys was named by loyal customers as "Best Lunch Hour Spot" for its swift service and good group accommodations, and "Best Restaurant for Kids" for its nutritious food and, in many cases, "cyber-deli" counters. In the Schlotzkys stores that contain the "cyber-deli" counters, customers can surf iMacs and flat-screen PCs with Internet access. Customers can e-mail friends or follow homepage links to the nation's top newspapers and their children can play computer games without charge. Schlotzky's CEO has been quoted as saying, "We think this is the restaurant playground of the future". Possible estimates of the costs of outfitting stores with "cyber-deli" counters, incremental to the cost estimates listed above include: Desktop Computer, including installation costs $2,000 each, annually Internet costs (irrespective of the number of connections) $100 monthly Total incremental sales attributable to "cyber-deli" for 1 desktop $12,000 annually Total incremental sales attributable to "cyber-deli" for 2 desktops $17,000 annuallyTotal incremental sales attributable to "cyber-deli" for 3 desktops $14,000 annually A potential franchisee, Ozzie.com, manufactures supply packages used for integrating consumer home theater, audio, computer, and security systems. The company wants to diversify its business and is considering, as a first step in a larger plan, the acquisition of a Schlotzsky's franchise store. Ozzie.com is a publicly-traded firm and is sensitive to signaling profitable operations to its shareholders. Ozzie.com currently has 600 employees and an ROI of 10%. You should make the following assumptions, where applicable, in preparing any quantitative analyses: . The franchise acquisition costs should be depreciated on a straight-line basis over ten years. . Income taxes should be ignored. You must justify clearly any further assumptions that you believe you need to make to address the case questions. 1 Available from the Scholtzsky.com website, as at February 20, 2002. 2 http:/www.kiomag.com/schlotzsky's "http:/www.warn.com/appsews/art.xpl?id=3380531&f=NEWS&s=BUNZ 4 http:/www.kiomag.com/schlotzsky's " Incremental sales decline if a third desktop is added to the capacity of the "cyber deli" because the store starts to become congested, which, on a relative basis, can harm repeat business.During the process of negotiating with Schlotzsky's, Ozzie.com was given access to various internal performance reports from a typical franchise in the Austin area. An extract from one of the weekly reports was as follows: Actual Costs: Flexible Budget: Actual Input x Actual Price Actual Input x Budgeted Price Budgeted Input Allowed for Actual Output x Budgeted Price Ingredients $10,096 (408 pounds * $25) (4,488 products x 0.10 pounds x $25) $10,200 $11,220 Ingredients Variances $104 $1,020 Crew Labor $8,058 (442 hours $18) (4,488 products x 0.08 hours * $18) $7,956 $6,463 Crew Labor Variances $102 $1,493 Provide an economically plausible evaluation of the pattern of ingredient and crew labor cost variances documented in the weekly internal performance report. Also explain what further information you might request to verify your evaluation of the cost variances