Shortline Espresso is a gourmet dessert restaurant in Seattle. Margie McMahon, the sole proprietor, expanded to a second location in Bellingham 3 years ago. Recently, McMahon decided to enroll in a PhD program and retire from active management of the individual restaurants but continues to oversee the entire company. She hired a manager for each restaurant. In 20X3, each had sales of $1,200,000. The Bellingham restaurant is still pricing lower than the Seattle restaurant to establish a customer base. Variable expenses run 70% of sales for the Seattle restaurant and 75% of sales for the Bellingham restaurant.

Each manager is responsible for the rent and some other fixed costs for his or her restaurant. These costs amounted to $110,000 for the Seattle restaurant and $75,000 for the one in Bellingham. The difference is primarily due to lower rent in Bellingham. In addition, several costs, such as advertising, legal services, accounting, and personnel services, were centralized. The managers had no control of these expenses, but some of them directly benefited the individual restaurants. Of the $345,000 cost in this category, $100,000 related to Seattle and $185,000 to Bellingham, where most of the additional cost in Bellingham is due to the cost of extra advertising to build up its customer base. The remaining $60,000 was general corporate overhead.

1. Prepare income statements for each restaurant and for the company as a whole. Use a format that allows easy assessment of each managers performance and each restaurants economic performance.

2. Using only the information given in this exercise, do the following: a. Evaluate each restaurant as an economic investment. b. Evaluate each manager.

Consider the following data (in thousands):

Average invested capital Revenue Income

Hubert

$2,000 3,600 180

Division Duane

$ 600 1,200 84

Louis

$1,800 9,000 216

1. For each division, compute the return on sales, the capital turnover, and the return on investment (ROI).

2. Which division is the best performer if evaluation is based on ROI? Explain.

3. Suppose each division is assessed a cost of capital of 10% on invested capital. Compute the economic profit for each division. Which division is the best performer based on economic

   profit? Explain.