Best friends, Nathan and Cody, decided to start their own business which would b
ID: 2474378 • Letter: B
Question
Best friends, Nathan and Cody, decided to start their own business which would bring authentic Mexican food to their local communities. Together they have started the Great Tamale, a food cart. Nathan is the chef, having spent considerable time studying Mexican cuisine abroad. Cody takes the orders and manages the business operations.
Thanks to an appearance on the Food Network, the Great Tamale food cart has experienced a phenomenal first year. In its first year of operations the company sold 31,125 plates of food and had the below sales and cost figures.
The best friends worked tirelessly in their first year of operations and know that another challenging and competitive year lies ahead of them. Now entering their second year of operations, they are considering two alternatives and have hired your consulting group, known for its inventive business and accounting consulting work, to help them make some important business decisions.
Alternative 2 - Restaurant
Nathan and Cody notice there is stiff competition in the food cart and food truck industries and therefore are considering opening a traditional restaurant.
Opening a restaurant would have many advantages and disadvantages, the company can expect fixed costs to increase by $125,000 a year to cover rent, equipment, furniture, salaries and other costs.
This alternative is exclusive of alternative 1 -so use the original financial information from page 1 (also shown below) to calculate the effects of opening a restaurant.
Additional Information:
This alternative would allow GT to increase their plate prices to $14.50 and would increase the variable cost per unit by $2.50. Assume plate sales remain at 31,125.
1) Compute the company's new contribution margin under this alternative. Compute the contribution margin both in total dollars and per unit
2) Compute the company's contribution margin ratio under both scenarios. (Note: Do not round the CMR for accurate calculations in the following questions).
3) Compute the break-even point in sales dollars under each scenario. How many plates will need to be sold under each situation to break-even?
4) If the company wishes each scenario, food cart and restaurant, to generate target income $250,000, what is the amount of sales that needs to be generated? How many plates will then need to be sold? Prepare a contribution margin statement for this step and verify that your before tax income is $250,000 (after-tax net income in fact equals $170,000) for both the food cart and restaurant
5) Assume that the company expects sales to decline by 20% next year. There will be no change in plate price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two types (assume a 32% tax rate, and that any loss before taxes yields a 32% tax savings).
6) Assume that the company expects sales to increase by 20% next year. There will be no change in plate price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two types (assume 32% tax rate, and that any loss before taxes yields a 32% tax savings).
7) Identify at least two advantages and disadvantages of having a brick-and-mortar restaurant versus a food truck.
8) Thinking about sales, is there any day of the week or time of day when greater sales are expected? Which type is more sensitive to this occurrence? Which type is less sensitive to this occurrence? Which type is more advantageous and why? Is there anything else the company can do to manage the decline in sales that come with certain days and times?
9) Since no advertising budget is available under this alternative, what are some creative and low-cost methods the company could employ to help advertise the change to a restaurant?
10) Compute the Profit Margin and Return on Assets for each scenario assuming average total assets of $900,000. Industry averages are 15% and 7% respectively.
Explanation / Answer
Alternative 1 Alternative 2 Sales 217,875.00 451,312.50 Sales @ 14.5 per unit Variable cost 46,687.50 124,500.00 Contribution margin 171,187.50 249,000.00 fixed costs 90,000.00 215,000.00 Add 125,000 additional Income before taxes 81,187.50 34,000.00 Income tax @32% 25,980.00 150,980.00 Net income 55,207.50 180,207.50 Per unit conribution margin 5.50 8.00 Contribution margin ratio 78.57% 55.17% Breakeven units = fixed cost/contribution per unit 16,364 26,875 Number of breakeven units Sales in dollars 114,545.45 389,687.50 To achieve profit before tax of 250,000 42,641.00 Total units to be sold
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