MBA 6100 Case study Case #1

Sales $2,158,400

Cost of sales (all variable) $1,246,050

Gross Margin $912,350

Operating expenses:

Variable $222,380

Fixed $170,940

Total operating expenses: $393,320

Administative expenses (all fixed) $451,500

Net operating income $67,530

The above income statement presents the sales, expenses and pre-tax operating income for a local

eating facility. At this facility, the average meal cost for lunches and dinners are $20 and $40

respectively. This restaurant serves both lunch and dinner 300 days per year, and serves twice as many

lunches as dinners.

As the MBA intern working on assignment you are to prepare a managerial accounting focused report to

the owners of the restaurant, to include the following:

1. Prepare a contribution margin income statement using the given financial data.

Use the following format:

Sales

Variable costs

Cost of sales

Operating

Total variable costs

Contribution margin

Fixed costs

Operating

Administrative

Total fixed costs

Net operating income

2. Compute the break-even volume of the number of lunches and dinners. Assume that the CM%

for each meal category is the same as the average CM% as calculated in #1.

Hint: To solve a break even sales mix, use the horizontal formula:

Net operating income = ($Sales $Variable costs) $fixed costs

Net operating income = $CM $fixed costs

At Breakeven, NOI = $0

Therefore, $CM = $ Fixed costs

Sales $2,158,400

Cost of sales (all variable) $1,246,050

Gross Margin $912,350

Operating expenses:

Variable $222,380

Fixed $170,940

Total operating expenses: $393,320

Administative expenses (all fixed) $451,500

Net operating income $67,530

Sales

Variable costs

Cost of sales

Operating

Total variable costs

Contribution margin

Fixed costs

Operating

Administrative

Total fixed costs

Net operating income

Now solve for the unit $CM for each item. Let X be the number of dinners, 2X the

number of lunches. $CM is the combined total of the $CM for dinners, and the $CM for

lunches.

3. Using the CM income statement format, verify that your calculated break-even volume for

lunches and dinners results in a NOI of zero (hint: in your prepared CM statement from #1,

breakout the Sales dollars into subcategories lunch and dinner as shown below, using the values

of X for in the # of meals cells). Present the entire CM statement at the BE level.

Sales: per meal # of meals $ Total

Dinner

Lunch

Total sales:

4. The owner of the restaurant is thinking of increasing sales through additional advertising, which

she will incur as an administrative expense. The proposed additional advertising campaign will

cost $25,000. She anticipates that the additional advertising expense will result in an additional

6 lunches and 3 dinners on average, per day. Illustrate the impact on NOI assuming the changes

above (hint: show a revised CM statement).

Hint: for this type of what-if, compare the additional contribution margin impact on NOI given

the change in units and change in fixed costs.

5. In order to increase NOI, the owner of the restaurant is considering adjustments to the quality

of food ingredients currently used. Rather than using premium ingredients, use of average

quality ingredients would reduce the cost of food by 15%. The owner proposes to not change

the current meal pricing.