You are a junior accountant working for Martin's Kitchen, a chain of 95 restaurants in the Southeast US that has been in business for 27 years. As a result of the Covid-19 pandemic the dining room capacity in all restaurants has been limited to 50% for the next 6 months. As a result of this restriction the top management team at Martin's Kitchen has been discussing whether to continue to keep the dining rooms open at each restaurant or be open for carryout only. If the decision is made to be open for carry out only they are also considering changing the menu to include several new menu items that will be more popular for carryout customers. If the menu is changed this will result in additional costs for new restaurant equipment to be able to make the new menu items. Elizabeth, Martin Kitchen's CFO is an advocate for keeping the dining rooms open and for not making any changes to the menu for carryout purposes. She described her reasoning as follows: "Because we have a lot of fixed costs in our cost structure, we need to do everything we can to generate as much revenue as possible which suggests that we should keep our dining rooms open even if we are limited to 50% capacity. Second, we know that changing the menu will result in additional costs and I believe we need to limit any new costs during this difficult time for our business. Finally, because carryout orders do not include as many drinks and other add on items, we know that the average check size per customer will decrease for carryout orders as compared to dine-in orders." You have been tasked with using CVP analysis to be able to give top management better information about which course of action would be best for the company. You have the following information about the company's costs that you have put together to help you with your CVP analysis: 1. Average monthly rent for each restaurant is $12,000. All restaurants are rented under 10 year non-cancellable leases. All restaurants have at least 3 years remaining on their leases. 2. Total PPE costs for employees for the next six months are estimated to be $855,000 if the dining rooms are kept open. Total PPE costs for employees for the next six months are estimated to be $295,000 if the dining rooms are closed. 3. Average annual depreciation costs for each restaurant is $114,000. 4. Changes to the carryout menu will require the purchase of $135,000 in new equipment for each restaurant. It is assumed that this new equipment will be used for 5 years and will have no salvage value at the end of 5 years. 5. Food costs prior to the pandemic averaged 25% of gross revenues. It is somewhat unclear whether food costs will remain the same % of gross revenue or change in the current environment if the dining rooms are kept open. For this reason top management has asked you to estimate food costs at the following 3 levels if the dining rooms are kept open. Food costs stay at 25% of gross revenue Food costs increase to 28% of gross revenue Food costs decrease to 21% of gross revenue 6. If the dining rooms are closed and the menu is changed to offer more popular carryout items, food costs should decrease because of higher margin products on the new menu although there is still some uncertainty about what food costs will be in this scenario as well. For this reason, top management has asked you to also estimate food costs at three separate levels if the dining rooms are closed and the carryout menu is changed Food costs are 23% of gross revenue Food costs are 26% of gross revenue Food costs are 19% of gross revenue 7. Labor costs for each restaurant consists of the following: 1 store manager who is paid a salary of $65,000 per year (this includes applicable benefits). This manager will be retained regardless of whether or not the dining room is open. 20 employees who earn an average hourly wage of $16 (this includes applicable benefits) If the dining rooms are kept open it is estimated that the average number of hours per employee per week will be 30 If the dining rooms are closed and only carryout is offered it is estimated that the average number of hours per employee per week will be 18 8. Before the pandemic the average check per customer was $21.45. If the dining rooms are kept open it is assumed that the average check size will stay the same. However, if the dining rooms are closed it is assumed that the average check size per carryout customer will decrease to $18.10. A. Using the information provided above, calculate the breakeven point (in number of customers) i. if the dining rooms are kept open ii. if the dining rooms are closed and restaurants are open for carryout only B. Assume Martin's Kitchen would like to generate positive monthly income after taxes of $8,000 per restaurant. Assume Martin's Kitchen is subject to an average tax rate of 25%. Calculate the target profit point (in number of customers) i. if the dining rooms are kept open ii. if the dining rooms are closed and restaurants are open for carryout only C. In addition to the two possibilities outlined above of keeping the dining room open and closing the dining rooms and revamping the carryout menu, assume that Martin's Kitchen is also considering a third option - to keep the dining rooms open and also revamp the carryout menu. If this third scenario is taken, assume a mix of 60% dine in customers and 40% carryout customers and assume that the average total number of hours per hourly employee will increase to 35 and that PPE costs will be the same as if only the dining rooms were open. To minimize the number of calculations, use the midpoint in food cost % for both dine-in and carry-out customers. What is the new break-even point using these assumptions? D. Would this decision (whether to keep the dining rooms open and whether to revamp the carryout menu) have any impact on the operating leverage for Martin's Kitchen? Why or why not? Name at least two factors included in the problem that you believe could impact the operating leverage of Martin's Kitchen and note the direction (increase or decrease) you believe each of these factors would have on Martin's Kitchen's overall operating leverage. E. Describe at least one factor that should be considered when making the decision about closing or keeping the dining rooms open that was not included or discussed in the case. You are a junior accountant working for Martin's Kitchen, a chain of 95 restaurants in the Southeast US that has been in business for 27 years. As a result of the Covid-19 pandemic the dining room capacity in all restaurants has been limited to 50% for the next 6 months. As a result of this restriction the top management team at Martin's Kitchen has been discussing whether to continue to keep the dining rooms open at each restaurant or be open for carryout only. If the decision is made to be open for carry out only they are also considering changing the menu to include several new menu items that will be more popular for carryout customers. If the menu is changed this will result in additional costs for new restaurant equipment to be able to make the new menu items. Elizabeth, Martin Kitchen's CFO is an advocate for keeping the dining rooms open and for not making any changes to the menu for carryout purposes. She described her reasoning as follows: "Because we have a lot of fixed costs in our cost structure, we need to do everything we can to generate as much revenue as possible which suggests that we should keep our dining rooms open even if we are limited to 50% capacity. Second, we know that changing the menu will result in additional costs and I believe we need to limit any new costs during this difficult time for our business. Finally, because carryout orders do not include as many drinks and other add on items, we know that the average check size per customer will decrease for carryout orders as compared to dine-in orders." You have been tasked with using CVP analysis to be able to give top management better information about which course of action would be best for the company. You have the following information about the company's costs that you have put together to help you with your CVP analysis: 1. Average monthly rent for each restaurant is $12,000. All restaurants are rented under 10 year non-cancellable leases. All restaurants have at least 3 years remaining on their leases. 2. Total PPE costs for employees for the next six months are estimated to be $855,000 if the dining rooms are kept open. Total PPE costs for employees for the next six months are estimated to be $295,000 if the dining rooms are closed. 3. Average annual depreciation costs for each restaurant is $114,000. 4. Changes to the carryout menu will require the purchase of $135,000 in new equipment for each restaurant. It is assumed that this new equipment will be used for 5 years and will have no salvage value at the end of 5 years. 5. Food costs prior to the pandemic averaged 25% of gross revenues. It is somewhat unclear whether food costs will remain the same % of gross revenue or change in the current environment if the dining rooms are kept open. For this reason top management has asked you to estimate food costs at the following 3 levels if the dining rooms are kept open. Food costs stay at 25% of gross revenue Food costs increase to 28% of gross revenue Food costs decrease to 21% of gross revenue 6. If the dining rooms are closed and the menu is changed to offer more popular carryout items, food costs should decrease because of higher margin products on the new menu although there is still some uncertainty about what food costs will be in this scenario as well. For this reason, top management has asked you to also estimate food costs at three separate levels if the dining rooms are closed and the carryout menu is changed Food costs are 23% of gross revenue Food costs are 26% of gross revenue Food costs are 19% of gross revenue 7. Labor costs for each restaurant consists of the following: 1 store manager who is paid a salary of $65,000 per year (this includes applicable benefits). This manager will be retained regardless of whether or not the dining room is open. 20 employees who earn an average hourly wage of $16 (this includes applicable benefits) If the dining rooms are kept open it is estimated that the average number of hours per employee per week will be 30 If the dining rooms are closed and only carryout is offered it is estimated that the average number of hours per employee per week will be 18 8. Before the pandemic the average check per customer was $21.45. If the dining rooms are kept open it is assumed that the average check size will stay the same. However, if the dining rooms are closed it is assumed that the average check size per carryout customer will decrease to $18.10. A. Using the information provided above, calculate the breakeven point (in number of customers) i. if the dining rooms are kept open ii. if the dining rooms are closed and restaurants are open for carryout only B. Assume Martin's Kitchen would like to generate positive monthly income after taxes of $8,000 per restaurant. Assume Martin's Kitchen is subject to an average tax rate of 25%. Calculate the target profit point (in number of customers) i. if the dining rooms are kept open ii. if the dining rooms are closed and restaurants are open for carryout only C. In addition to the two possibilities outlined above of keeping the dining room open and closing the dining rooms and revamping the carryout menu, assume that Martin's Kitchen is also considering a third option - to keep the dining rooms open and also revamp the carryout menu. If this third scenario is taken, assume a mix of 60% dine in customers and 40% carryout customers and assume that the average total number of hours per hourly employee will increase to 35 and that PPE costs will be the same as if only the dining rooms were open. To minimize the number of calculations, use the midpoint in food cost % for both dine-in and carry-out customers. What is the new break-even point using these assumptions? D. Would this decision (whether to keep the dining rooms open and whether to revamp the carryout menu) have any impact on the operating leverage for Martin's Kitchen? Why or why not? Name at least two factors included in the problem that you believe could impact the operating leverage of Martin's Kitchen and note the direction (increase or decrease) you believe each of these factors would have on Martin's Kitchen's overall operating leverage. E. Describe at least one factor that should be considered when making the decision about closing or keeping the dining rooms open that was not included or discussed in the case