You are a member of an independent consulting firm that specializes in serving the restaurant industry. Unlike many consulting firms that are extensions of audit firms, your firm has serious and in depth expertise with the restaurant industry. The following is a typical assignment. "Pasta, etc." is a chain of Italian casual dining restaurants located in southern Ontario. The res taurants are at the top end of the casual dining segment; guests are offered many of the benefits of fine dining without the formality. The menu is lim- ited to approximately 20 entrees to ensure a high level of execution and service. Menu items such as steaks, pork chops, ribs, roast beef, chicken, scafood and salads are complemented by a wide assortment of alcoholic and other beverages. The chain is only five years old, but already there are 74 outlets. The owners had planned to expand the number of outlets to 100 in Ontario over the next two years and then expand across Canada and into the United States. However, recent performance has been disappointing. Some background is useful. The Torra family arrived in Toronto from Italy in 1955. Tony worked in an Italian restaurant immediately upon arrival in Canada. After one year he started his own restaurant, which provided him and Enza and their two children with a very good livelihood. Both boys-Joe and Donnie - went to university. Joe became a high school mathematics teacher, while Donnie became a dietician and joined the family restaurant. As the original restaurant was not large enough for Tony and Enza, plus Donnie with his growing family, Donnie persuaded the other mem- bers of the family that expansion was necessary. It took three years to convert the original restaurant into an expansionary "model restaurant" that would be relatively simple and, therefore, could be man- aged by a non-family member. The excitement of expanding the family busi- ness encouraged Joe to give up teaching high school mathematics in order to return to the family busi ness. In the following five years, Joc and Donnie went from one to the current 74 restaurants. They are now wondering what happened. All 74 restaurants are basically the same. Sales have exceeded expectations, but profits are much less than expected. There is some variabil- ity in sales among the 74 restaurants. There is a scheduling model that, based on sales, assigns the optimal number of employees to be on staff for each restaurant (i.c., restaurants with higher revenue will require more employees in order to maintain service quality). The planning, budgeting, and financial reporting systems are fully adequate. Employees are remunerated with basic wages, plus incentives tied to sales. These incentives account for about 20 percent of the average employee's remuneration, and thus there is a keenness among employees to maximize sales. In your consulting assignment, your concern is with what is going wrong with the restaurants. You suspect operational problems; thus, you and your associates study a random sample of 5 of the 74 restaurants. All five are very similar, with the restaurant in Exhibit 1 being representative. Because Joe and Donnie cannot agree on the reasons for the profit shortcomings, and thereby on the solutions, your consulting firm has been hired. Joe believes that sales improvements will solve the profit shortcomings. Donnie, in contrast, believes the inadequate cost control has caused the profit shortcomings. However, neither has been able to gather convincing evidence. Pasta, etc. is fortunate in having a specialized restaurant enterprise resource planning (ERP) sys- tem that has the potential for linking all systems.. Although the potential of the ERP system is just starting to be utilized, it can calculate the price and variable costs for the 20 entrees that are being sold. This information is shown in Exhibit 2. EXHIBIT 1: OPERATING STATEMENT ($ 000s) Variable cost of sales Direct materials Direct labour Variable overhead Contribution margin Faed costs Other labour Rent Utilities Miscellaneous Net Income Budget $2,900 500 900 200 1,600 1,300 150 200 150 50 550 750 Actual 3,060 713 1,126 257 2,096 964 152 197 157 46 552 412 Required Use the case approach to identify and ove the profit problems facing the model restau- CASE 26 PASTA, ETC. FAMILY RESTAURANTS 97 EXHIBIT 2: PRICE AND VARIABLE COST PER ENTREE #1 #2 # 4 #5 #6 #8 #9 #10 #11 #12 #13 #14 #15 # 16 #17 # 18 # 19 #20 Price Per Entree $27.50 24.75 24.00 19.75 19.50 17.50 12.00 11.25 19.75 8.50 13.00 21.50 17.25 14.00 20.50 18.00 14.50 10.00 14.50 19.75 Variable Costs per Entree $20.25 18.05 15.24 13.04 8.39 7.90 6.59 7.88 9.94 4.09 9.44 13.74 9.86 8.23 13.75 6.71 7.62 4.85 7.42 10.67