John and Denise's Restaurant.

Background:

John and his wife Denise opened their cafe 3 years ago. They initially started their small caf selling a bit of coffee and cake at the back of their renovated cottage. The caf, situated on the south-west coast of WA, required an investment of $225,000.

As a result of local demand, John and his wife extended the caf and shifted their focus to cater for the local appetite for healthy hamburgers prepared with fresh, local ingredients. They produce and sell 3 sizes of hamburger: small, regular, and large, all of which are served with fries and a Coke. In their restaurant, apart from direct labour workers, John and Denise employ 4 staff - 2 chefs, and 2 waiters ($2500, each, permonth).

Product sales, costs and other information for 2018, are shown in the following table:

	Small	regular	large	Total
Sales price per units	$10.00	$15	$18.00
Number of units sold	50,000	40,000	35,000	125,000
Direct materials	$3	$4	$4.5
Direct labour hours per unit	0.16	0.20	0.25
Cost per hour	$30	$30	$30
Variable overhead costs	$1.5	$3	$3.5
Fixed overhead costs				$175,000
Sales and administrative costs				$50,000

Note: variable overhead costs represent the cost of other ingredients.

Currently:

John and Denise are currently thinking of extending their business by opening a second restaurant. Due to the growing number of tourists and students coming to Tasmania, they are considered it to be an ideal place to set up this business. The couple have two choices: either to purchase a property in Hobart or rent one. If they go with the first, they envisage financing the cost of buying the property ($450,000) and converting it, with a home loan.

John and Denise have now approached you, a highly capable and reputable team of management and cost accountants, based in Hobart. They have chosen your team because of your excellent reputation, and knowledge of local council regulations, and have provided you with the following cost estimates (including General Sales Tax) of converting the property (if they choose to buy a property):

Building contractor	$25 000
Flooring, paving and patio materials	20 000
Structural improvements e.g. shopfront, counter, floors and ceilings	35 000
Subcontractors e.g. electricians, plumbers and civil works	20 000
Total conversion cost	$100 000

John and Denise advise you that irrespective of the option they finally choose (buying a property or renting one), they will buy standard furniture and fittings at a cost of $25 000. They estimate that these will have to be replaced every 10 years. They also plan to purchase kitchen equipment for $100,000, to be financed by a bank overdraft. This equipment will also need to be replaced at10-yearly intervals.

John and Denise estimate that their first-year sales in Hobart will be 20% lower than those in their WA business, but that these will increase by 10% per year. Apart from direct labour workers, they plan to hire 3 staff, one to cook, who will receive a salary of $2500 per month, and two to fill orders(2.5% commission for each), as well as a supervisor, who will receive a salary of $3,000 per month. They aim to make profitno less than $50 000 per year.

The couple ask you to research the financial viability of the proposed project.

You are required to:

1. respond to this request by developing an excel workbook;

2. use this excel workbook to determine, for each of the options, the breakeven point, in dollars and numbers, for the expected product mix;

3. determine the annual profit for years 1, 2 and 3, for both options, and decide, in each case, which of the existing burgers should be promoted more aggressively than the others to achieve the target profit;

4. calculate, for both options, the payback period for John and Denise's investment;

5. advise John and Denise, in a written business report, whether they could maximise profitability by changing sale prices or the mix of existing sales, or both. Your advice must be supported by your excel workbook calculations and qualitative evidence;

6. In your report, advise John and Denise, on the basis of 3 and 4, above, whether they should buy a property or rent one;

Before starting to develop your excel workbook, you need to estimate the following costs:

1. estimate the cost of water usage.
2. estimate the cost of interest
3. estimate the cost of the electricity usage.
4. estimate the cost of the rent.

Important

The length of the report is limited to a maximum of 2000 words, including the executive summary. DO NOTcopy and paste .jpg and other image files into your word document to circumvent the word count, or you will be penalised. Reference your excel workbook rather than copy and paste tables and diagrams into your written report. The report and accompanying spreadsheet will be marked strictly according to the rubric supplied. Information not supplied in the case or need to be estimated should be obtained from industry sources, which should be appropriately referenced.