QUESTION 3 (24 marks) NOTE: To incorporate data / calculations from Question 2 when answering Question 3. In addition to the all-you-can-eat buffet", Bottomless Pot is considering offering set-meals for diners in 2021. The costs of food for the set-meals is expected to be $4 per set-meal and the direct fixed costs are $5,000 per month. Besides the costs of food, there are additional variable costs of S7 per diner regardless of whether they ordered buffet or set-meals. Other than the costs of food, Bottomless Pot expects to incur common fixed selling and administrative costs totalling $80,262 per month. It is estimated that 80% of the diners would order the buffet and the remaining diners would order the set-meals. Bottomless Pot charges each diner $50 for the buffet and $30 for the set- meal. Required: (a) Bottomless Pot expects 5,850 diners in January 2021. Calculate January's operating income for buffet, set-meals and the restaurant as a whole. (4 marks) (b) Refer to (a). Calculate the number of diners to break-even per month. (5 marks) (c) Refer to (a). (1) Calculate the margin of safety (in sales dollars) for January 2021. (ii) Define "margin of safety". (iii) Explain briefly the significance of Bottomless Pot's margin of safety for January (7 marks) (d) Bottomless Pot observes that the profit margin for the buffet is much higher than set- meals. It is considering reducing the price of the buffet to $45 per diner, and estimates that with the price reduction, 90% of the diners would order buffet instead of set-meals. (1) Re-calculate the operating income for 5,850 diners. (ii) How much is the change in operating income as compared to (a). Should Bottomless Pot go ahead with this change? (8 marks) QUESTION N 2 (15 marks) Bottomless Pot operates a restaurant that offers "all-you-can-cat buffet". The following data shows the costs of food for the buffet and the number of diners that ordered the buffet for last year, 2020. The restaurant manager is interested in finding the relationship between the costs of food and the number of diners. Month Number of diners Costs of food $ 2,832 4.895 3,920 3.840 January February March April May June July August September October November December 4,150 2,395 4,272 3,985 2.520 4,732 2.633 3,935 55,900 68,600 59,700 58,600 62,000 54,600 63,300 60,400 53,900 69,900 56.900 51,200 Required: (a) The cost of food is a mixed cost. (i) Describe what is a mixed cost. (11) Explain briefly why you think the cost of food for the buffet is a mixed cost. (4 marks) (b) Using the high-low method, develop the cost formula for the total costs of food. (5 marks) (c) Estimate the total costs of food for the first quarter of 2021 if Bottomless Pot expects 15,500 diners for the quarter. (2 marks) (d) (1) Explain what is "relevant range" Explain, using an example why would cost behaviour change outside the relevant range. The given example should use Bottomless Pot as reference
