CVP Module

Module Problem

Due: February 10 no later than 11:55 p.m.

Part 1.

Mo and Joe run a very successful restaurant in a busy downtown area. In spite of the fact that the firm is currently very profitable, the owners have decided to change things up a bit. They have gathered some information about current operations. In an average week, the restaurant serves 38,200 people with an average bill of $14.75. Food cost is $5.35 per person. Labour is $45,000 per week. All other costs amount to variable costs of $1.20 per person and $69,500 per week.

Mo wants to switch from the current meat and potatoes menu to Mexican food. He has done some research and found that the average bill per person would decrease by about $1.95. Average food cost would fall by 25%. Since the dishes can be prepared and served more rapidly, the tables can be turned more rapidly, resulting in an increase in people served of at least 20%. Labour would have to be increased by $4,000 per week in order to meet the new level of activity.

Joe wants to stick with the current cuisine. He believes it is more suitable for the downtown clientele. He wants to change to a new method of food delivery. iPads would be installed at each table and customers would order their food on the user-friendly menu. The order would be prepared in the kitchen and sent to the customers on a specially designed mini railroad that would run overhead. New equipment would cost $6,500,000. Depreciation would amount to $25,000 per week. Labour could be reduced by 25% and other variable costs would drop by $0.50 per person.

1. Which of the two new ideas will increase profits most (or decrease profits least)? Show computations.
2. Which way will the firm be more risky? Note: there are many measures of risk. There is no need to go beyond the material for this module.