How do you compute the contribution margin, contribution margin ratio and break even point for Alternative One-Food Truck?

ACCT 102 Group Project The Great Tamale Best friends, Nathan and Cody, decided to start their own business which would bring authentic Mexican food to their local communities. Together they have started the Great Tamale, a food cart. Nathan is the chef, having spent considerable time studying Mexican cuisine abroad. Cody takes the orders and manages the business operations. Thanks to an appearance on the Food Network, the Great Tamale food cart has experienced a phenomenal first year. In its first year of operations the company sold 31,125 plates of food and had the below sales and cost figures. Sales $217,875. 00 Variable costs 46,687.50 Contribution margin 171,187.5 0 Fixed costs 90,000.00 Income before taxes 81,187.50 Income taxes (32% rate) 25,980.00 $ 55,207.50 Net income The best friends worked tirelessly in their first year of operations and know that another challenging and competitive year lies ahead of them. Now entering their second year of operations, they are considering two alternatives and have hired your consulting group, known for its inventive business and accounting consulting work, to help them make some important business decisions. 1 ACCT 102 Group Project The Great Tamale Alternative 1- Food Truck After experiencing such great success with their food cart, Nathan and Cody are considering purchasing a food truck to serve other communities. This would allow the Great Tamale, GT, to reach even more customers in different geographic locations. There would be an increase in the selling price per plate. There will also be an increase in the fixed costs of $30,000 for advertising to inform the public of this change (this amount is already included below under Food Truck data). The financial information is presented below for this alternative as well as the original data. Assume 31,125 plates are sold for the food cart and 45,625 plates are sold for the food truck. Food Cart Food Truck Sales $ 217,875.00 $365,000.0 0 Variable costs 46,687.50 103,437.50 Contribution margin 171,187.50 261,562.50 Fixed costs 90,000.00 147,500.00 Income before taxes Income taxes (32% rate) 81,187.50 114,062.50 25,980.00 $ 55,207.50 36,500.00 $ 77,562.50 Net income Required: 1.) Compute the company's contribution margin under both scenarios, if GT decides to remain a regular food cart and if they decide to become a food truck. Compute the contribution margin both in total dollars and per unit. 2.) Compute the company's contribution margin ratio under both scenarios. (Note: Do not round the CMR for accurate calculations in the following questions). 2 ACCT 102 Group Project 3.) Compute the break-even point in sales dollars under each scenario. How many plates will need to be sold under each situation to breakeven? 3 ACCT 102 Group Project Alternative 1 Requirements (continued) 4.) If the company wishes each scenario, food cart and food truck, to generate target income of $250,000, what is the amount of sales that needs to be generated? How many plates will then need to be sold? Prepare a contribution margin statement for this step and verify that your income before taxes is $250,000 (after-tax net income in fact equals $170,000 at a tax rate of 32%) for both the food cart and food truck. 5.) Assume that the company expects sales to decline by 20% next year. There will be no change in plate price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two types (assume a 32% tax rate, and that any loss before taxes yields a 32% tax savings). 6.) Assume that the company expects sales to increase by 20% next year. There will be no change in plate price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two types (assume 32% tax rate, and that any loss before taxes yields a 32% tax savings). 7.) Thinking about sales, is there any day of the week or time of day when greater sales are expected? Which type is more sensitive to this occurrence? Which type is less sensitive to this occurrence? Which type is more advantageous and why? Is there anything else the company can do to manage the decline in sales that come with certain days and times? 8.) How do you recommend the company use the $30,000 advertising budget available under this scenario in order to achieve a maximum effect on their target audience? 9.) Compute the Profit Margin and Return on Assets for each scenario assuming average total assets of $500,000. Industry averages are 20% and 10% respectively. 4 ACCT 102 Group Project The Great Tamale Alternative 2 - Restaurant Nathan and Cody notice there is stiff competition in the food cart and food truck industries and therefore are considering opening a traditional restaurant. Opening a restaurant would have many advantages and disadvantages, the company can expect fixed costs to increase by $125,000 a year to cover rent, equipment, furniture, salaries and other costs. This alternative is exclusive of alternative 1 -so use the original financial information from page 1 (also shown below) to calculate the effects of opening a restaurant. Sales $217,875. 00 Variable costs 46,687.50 Contribution margin 171,187.5 0 Fixed costs 90,000.00 Income before taxes 81,187.50 Income taxes (32% rate) 25,980.00 $ 55,207.50 Net income Additional Information: This alternative would allow GT to increase their plate prices to $14.50 and would increase the variable cost per unit by $2.50. Assume plate sales remain at 31,125. 1.) Compute the company's new contribution margin under this alternative. Compute the contribution margin both in total dollars and per unit. 2.) Compute the company's contribution margin ratio under both scenarios. (Note: Do not round the CMR for accurate calculations in the following questions). 3.) Compute the break-even point in sales dollars under each scenario. How many plates will need to be sold under each situation to breakeven? 5 ACCT 102 Group Project Alternative 2 Requirements (continued) 4.) If the company wishes each scenario, food cart and restaurant, to generate target income $250,000, what is the amount of sales that needs to be generated? How many plates will then need to be sold? Prepare a contribution margin statement for this step and verify that your before tax income is $250,000 (after-tax net income in fact equals $170,000) for both the food cart and restaurant. 5.) Assume that the company expects sales to decline by 20% next year. There will be no change in plate price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two types (assume a 32% tax rate, and that any loss before taxes yields a 32% tax savings). 6.) Assume that the company expects sales to increase by 20% next year. There will be no change in plate price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two types (assume 32% tax rate, and that any loss before taxes yields a 32% tax savings). 8.) Identify at least two advantages and disadvantages of having a brickand-mortar restaurant versus a food truck. 9.) Thinking about sales, is there any day of the week or time of day when greater sales are expected? Which type is more sensitive to this occurrence? Which type is less sensitive to this occurrence? Which type is more advantageous and why? Is there anything else the company can do to manage the decline in sales that come with certain days and times? 10. ) Since no advertising budget is available under this alternative, what are some creative and low-cost methods the company could employ to help advertise the change to a restaurant? 11.) Compute the Profit Margin and Return on Assets for each scenario assuming average total assets of $900,000. Industry averages are 15% and 7% respectively. 6 ACCT 102 Group Project The Great Tamale Conclusion Comparing your calculations from alternative 1 and alternative 2 -which does your group recommend for the business owners? Why? The company can only pick one of the alternatives, due to the time and resources involved, so you will need to make a compelling case to support your decision. Be sure to identify the demographics and any other assumptions used in your analysis. Project Requirements 1.) Written Report -formal written report stating your group's choice for either alternative 1 or 2. The report should be a minimum of 3 pages, maximum of 5 -double spaced and be structured accordingly: i. ii. iii. iv. v. Introduction -provide an overview of the current situation, the alternatives available, and the demographics for the business location your group has selected. Alternative Choice & Justifications -state the alternative your group chose and cite the financial or qualitative reasons behind your choice. Please cite outside sources appropriately. Advantages & Disadvantages -address the advantages and disadvantages (both quantitative and qualitative) of both alternatives. Recommendations -provide any advertising or other business recommendations to the company to help them succeed in their implementation of the new alternative. Summary -summarize your stance and key points. 2.) Calculations/Responses -your group's calculations and responses for alternatives 1 and 2 should be typed and neatly presented behind your report as appendices. Work must be shown for calculations in order to receive full credit (Excel is recommended). Headaches 7