Danny is the owner of the Repas French restaurant. The restaurant does good volume but due to very weak local economy, Danny is considering promotions and price reductions next year that would, on average, reduce both his food and beverage prices by 5 percent. He is hoping that such price reductions can allow him to maintain his current sales level by attracting new customers as well as encouraging his current customers to dine with him more frequently. Dannys P&L for last year is shown. Using the cost-related assumptions that follow, complete this years (current price) and next years (with 5 percent price decrease) forecasted P&L, then answer the questions that follow.Dannys assumptions with a 5 percent decrease in prices and very careful cost control are:1. Food cost percent will increase from 28 percent to 30 percent of food sales.2. Beverage cost percent will increase from 20 percent to 22 percent of beverage sales.3. There will be no change in labor cost or other operating expense.4. Due to increased numbers of guests served, there will be no reduction in total food and beverage revenue.
Repas P&L and 5% Price Reduction Forecasted P&L Current Price With 5% Price Decrease % Change $ 4,550,000 $ 3,750,000 800,000 $ 4,550,000 175,000 $ 21.43 $ 4.57 $ 1,050,000 SALES: Food Beverage Total sales Guests served Food check average Beverage check average COST OF SALES: Food (28%) Food (30%) Beverage (20%) Beverage (22%) Total Cost of Sales GROSS PROFIT: Food Beverage Total Gross Profit OPERATING EXPENSES: Salaries and wages (30%) $ 160,000 $ 1,210,000 $ 2,700,000 $ 640,000 $ 3,340,000 $ 1,365,000 $ 1,365,000 $ 410,000 $ 130,000 $ 410,000 $ 130,000 $ 2,500 $ 2,500 $ 145,000 $ 175,000 $ 105,000 $ 145,000 $ 175,000 $ 105,000 $ 169,000 $ 169,000 Employee benefits Direct operating expenses Music and entertainment Marketing Utility services Repairs and maintenance Administrative and general Occupancy Depreciation Total Operating Expenses Operating Income Interest Income Before Income Taxes Per Guest Income Before Income Taxes $ 250,000 $ 85,000 $ 2,836,500 $ 250,000 $ 85,000 $ 2,836,500 $ 503,500 $ 190,000 $ 313,500 $ 190,000 A. What is Danny's current Per Guest Income Before Income Taxes? B. If prices are reduced by 5 percent, how many guests must Danny serve to generate Total Sales equal to those he achieved last year? C. If prices are reduced by 5 percent, what is the percentage change in guests needed to generate Total Sales equal to that of last year? D. What would be Danny's Per Guest Income Before Income Taxes if he reduced prices and served the number of guests needed to generate Total Sales equal to last year? E. What would be the percentage change in Danny's Per Guest Income Before Income Taxes if he reduced prices and served the additional guests needed to generate Total Sales equal to last year? Repas P&L and 5% Price Reduction Forecasted P&L Current Price With 5% Price Decrease % Change $ 4,550,000 $ 3,750,000 800,000 $ 4,550,000 175,000 $ 21.43 $ 4.57 $ 1,050,000 SALES: Food Beverage Total sales Guests served Food check average Beverage check average COST OF SALES: Food (28%) Food (30%) Beverage (20%) Beverage (22%) Total Cost of Sales GROSS PROFIT: Food Beverage Total Gross Profit OPERATING EXPENSES: Salaries and wages (30%) $ 160,000 $ 1,210,000 $ 2,700,000 $ 640,000 $ 3,340,000 $ 1,365,000 $ 1,365,000 $ 410,000 $ 130,000 $ 410,000 $ 130,000 $ 2,500 $ 2,500 $ 145,000 $ 175,000 $ 105,000 $ 145,000 $ 175,000 $ 105,000 $ 169,000 $ 169,000 Employee benefits Direct operating expenses Music and entertainment Marketing Utility services Repairs and maintenance Administrative and general Occupancy Depreciation Total Operating Expenses Operating Income Interest Income Before Income Taxes Per Guest Income Before Income Taxes $ 250,000 $ 85,000 $ 2,836,500 $ 250,000 $ 85,000 $ 2,836,500 $ 503,500 $ 190,000 $ 313,500 $ 190,000 A. What is Danny's current Per Guest Income Before Income Taxes? B. If prices are reduced by 5 percent, how many guests must Danny serve to generate Total Sales equal to those he achieved last year? C. If prices are reduced by 5 percent, what is the percentage change in guests needed to generate Total Sales equal to that of last year? D. What would be Danny's Per Guest Income Before Income Taxes if he reduced prices and served the number of guests needed to generate Total Sales equal to last year? E. What would be the percentage change in Danny's Per Guest Income Before Income Taxes if he reduced prices and served the additional guests needed to generate Total Sales equal to last year
