Question

Denise is planning to open a take-away business in Hobart, which will sell healthy hamburgers prepared with fresh, local ingredients. These will come in two sizes: regular and large, and each order will be served with hot chips and a soft drink. The business will be open 4pm-8pm, 7 days a week, with all orders being filled and served on a drive-through basis

Denise has two options: to buy an existing take-away business, or open a new one. If she goes with the first option, she envisages financing the purchase cost ($160,000) with a bank loan. The furniture and kitchen equipment will need to be replaced at 5-yearly intervals. If she goes with this first option, sales for the first quarter are expected to be:

Regular   Large   Total
Sales (unit)   18,000   16,500   34,500

The sales growth is expected to be 5% per quarter.

If Denise goes with the second option, she will buy standard furniture and fittings at a cost of $25,000. She estimates that these will need to be replaced every 10 years. She also plans to purchase kitchen equipment, at $100,000, to be financed with a bank overdraft. This equipment will also need to be replaced at 10-year intervals. With this option, Denise has been advised that sales will be 20% lower than with the first option in the first year only. The business will also need a website, and advertising space in the local newspaper.

Irrespective of the option she finally chooses, Denise anticipates that sales will increase by 10% per year. She plans to hire 4 part-time staff, so that on any given day, two will be available to cook and fill orders. These will be paid an hourly rate, while Denise, as manager, will draw a monthly wage of $3,000. She will also employ a cleaner, who will be paid $1,000 a month. The building, which will have no seating capacity, will be leased from a local real-estate company. Denise aims to make an annual profit, before tax, of not less than $50,000.

She has now approached you, a highly capable and reputable team of management and cost accountants based in Hobart. Your team was chosen because of its excellent reputation, and extensive knowledge of local council regulations. Denise asks you to research the financial viability of the proposed project.

DO ONLY QUESTION 2 & 3 (PLEASE DO IT YOURSELF, IF YOU COPY FROM SOMEWHERE WILL REPORT TO CHEGG SUPPORT). If you do well, will rate you for sure.

You are required to:

1. Develop a projected budget (sales, purchases, expenses etc) for the next three years for both options.
2. Determine, for both options, the breakeven point, in dollars and units, for the expected sales mix;
3. Calculate the Payback Period and Net Present Value for Denise’s investment options.
4. Based on the annual profit for years 1, 2 and 3 for the best option, decide which of the existing burgers should be promoted more aggressively than the others to achieve the target profit.
5. In your report, explain first whether you should use Traditional Costing System or Activity-Based Costing?
6. In your report, advise Denise, on the basis of your calculations for points 1, 2 and 3 above, whether she should buy an existing restaurant or establish a new one;
7. Advise Denise, in the written business report, whether she could maximise profitability by changing sale prices or the mix of existing sales, or both.

Answer 1