Question

(Penne Pesto) Penne Pesto is a small restaurant in the financial district of San Francisco. Customers order from a variety of pasta dishes. The restaurant has 50 seats and is always full during the four hours in the evening. It is not possible to make reservations at Penne; most guests show up spontaneously on their way home from work. If there is no available seat, guests simply move on to another place. On average, a guest spends 50 minutes in the restaurant, which includes 5 minutes until
the guest is seated and the waiter has taken the order, an additional 10 minutes until the food is served, 30 minutes to eat, and 5 minutes to handle the check-out (including waiting for the check, paying, and leaving). It takes the restaurant another 10 minutes to clean the table and have it be ready for the next guests (of which there are always plenty). The aver-age guest leaves $20 at Penne, including food, drink, and tip (all tips are collected by the restaurant; employees get a fixed salary). The restaurant has 10 waiters and 10 kitchen employees, each earning $90 per evening (including any preparation, the 4 hours the restaurant is open, and clean-up). The average order costs $5.50 in materials, including $4.50 for the food and $1 for the average drink. In addition to labor costs, fixed costs for the restaurant include $500 per day of rent and $500 per day for other overhead costs. The restaurant is open 365 days a year and is full to the last seat even on weekends and
holidays. There is about $200,000 of capital tied up in the restaurant, largely consisting of furniture, decoration, and equipment.

b. What is the return on invested capital (ROIC) for the owner of the restaurant? [6.2]

c. Assume that you could improve the productivity of the kitchen employees and free up one person who would be helping to clean up the table. This would reduce the clean-up to 5 minutes instead of 10 minutes. What would be the new ROIC? [6.3]

Answer 1

please refer the solution and give up thumb,If any quarry please post comment.

Ànswer :

Company PP is a restaurant having total capacity of 50 seats.It operates during the four hours in the evening.

One guest spends total 50 minutes in the restaurent.The total time is divided into the following parts:

Time in placing order = 5 min

Time for food to be served = 10 min

Time to eat = 30 min

Time for check out = 5 min

Time taken to clean the table = 10 min

Revenue per customer =$20

Total number of employees = 20

Labor cost = $90 per evening (four hours)

Average order cost = $ 5.50

Rent = $ 500 per day

Capital tied up with restaurant = $200,000

a)

Determine the total number of guests served by the restaurant in one evening as shown below:

Total number of guests served = Total capacity X Total working hours

= 50 x 4

= 200 guests

Hence,the restaurant serves 200 guests per evening.

b)

Determine the Return on Invested Capital (ROIC) fpr the owner of the restaurant as shown below:

Return on Invested Capital (ROIC) = ......(1)

Calculate the profit per year of the firm as shown below:

Total revenue = Revenue per customer x Total number of customers per day x 365 days per year

= $20 x 200 x 365

= $1,460,000

Total cost = Labor cost + order cost +Rent +Overhead cost

=( 20 x 90 x 365)+(5.50 x 200 x 365)+(500 x 365)+(500 x 365)

=657,000+401,500+182,500+182,500

=1,423,500

Hence,

Profit per year = Total revenue - Total cost

= 1,460,000 - 1,423,500

= 36,500

Substituting this value in equation (1), the following value is obtained:

Return on Invested Capital (ROIC) =

=

= 0.1825

Hence, the return on invested capital for the owner of the restaurant is 0.1825.

C)

The clean-up time has reduced to 5 minutes instead of 10 minutes.It would increase the total number of customers served by the restaurant per day.

Now,determine the total number of guests served each day as shown below:

Number of customers served =

= 54.54 x 4

= 218.16 ~ 218

Therefore,

Total revenue = Revenue per customer x Total number of customers per day x 365 days per year

= $20 x 218 x 365

= $1,591,400

Total cost = Labor cost + Order cost +Rent + Overhead cost

=( 20 x 90 x 365) + (5.50 x 218 x 365) + (500 x365) + (500 x 365)

= 657,000+437,635+182,500+182,500

= 1,459,635

Hence,

Profit per year = Total revenue - Total cost

= 1,591,400 - 1,459,635

= 131,765

Substituting this value in equation (1), the following value is obtained:

Return on Invested Capital (ROIC) =

=

= 0.6588

Hence,the new value of return on invested capital (ROIC) for the owner of the restaurant is 0.6588

d)

Determine the new ROIC if the overhead charges reduced by $ 100 per day as shown below:

Total cost = Labor cost +Order cost + Rent +overhead cost

=(20 x 90 x 365)+(5.50 x 200 x 365)+(500 x 365)+(400 x 365)

=657,000+401,500+182,500+146,000

=1,387,000

Hence,

Profit per year = Total revenue - Total cost

= 1,460,000 - 1,387,000

= 73,000

Substituting this value in equation (1),the following value is obtained:

Return on Invested Capital (ROIC) =

=

= 0.365

Hence,the new return on invested capital for the owner of the restaurant is 0.365