Hmmm! is a neighbourhood coffee shop that sells the best coffee in the world. In addition to coffee, Hmmm! sells a few food items, mostly baked goods that pair well with coffee. The shop is open 24 hours. It runs three shifts, each staffed with the same number of people. The first shift begins at 6:00 a.m., the second at 2:00 p.m. and the third at 10:00 p.m. At the end of each month, the owner meets with the manager to discuss how things went that month and to prepare the budget for the upcoming month. The basic budget that is used each month is as follows:

Number of shifts

90

Number of customers

9,000

Cups of coffee sold

11,250

Food items sold

3,150

Coffee revenue

66,375

Food revenue

11,025

Coffee cost

14,400

Food cost

6,300

Labour cost

34,200

Utilities cost

12,150

Depreciation on equipment

1,500

Rent

900

At the end of February, the monthly budget meeting was held. The results for February were discouragingnet income was only $6,542. Much of the discussion centered around the three shifts that seemed to be contributing the least to the overall success of the firm. These are the last shift (from 10:00 p.m. to 6:00 a.m.) beginning on Sunday night through early Wednesday morning. The manager suggested that they close the shop for these three shifts. Both agreed that average customers per shift would likely increase as a result, perhaps to as much as 120 customers per shift. After much back and forth, they agreed to try closing those shifts for the month of March and re-evaluate after examining the results of the experiment. They prepared the budget based on the reduced number of shifts and the expected increase in customers per shift.

At the end of March, the owner prepared the following static budget analysis:

ItemsBudgetActualVariance

Number of shifts7878-

Customer9,3608,869491U*

Cup of coffee11,70012,206506F

Food items3,2764,9341,658F**

Coffee Revenue69,03066,5732,457U

Food Revenue11,46620,2278,761F**

Coffee Cost14,97614,459517F

Food Cost6,88011,5944,714U**

Labour cost29,64029,640-

Utilities Cost10,53010,140390F

Depreciation on Equipment1,5001,500-

Rent9001,000100U*

Authors Notes: For purposes of this exercise, please assume that the costs included in the budget are the only costs the firm incurs. Cups of coffee and number of food items sold are budgeted per customer. Utilities cost is budgeted per shift. Depreciation and rent are fixed. The asterisks in the final column indicate a significant variance based on a rule of thumb that anything over 5% of the budget is significant.

1)Prepare a flexible budget analysis for Hmmm! for the month of March.

2)Compute expected profit according to the original budget (before the experiment).

3)Compute expected profit according to the March 1 budget.

4)Compute expected profit according to the flexible budget.

5)Compute actual profit.

6) What recommendation would you make to management about the experiment of closing down the three shifts?Provide support for your position from the budget