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Question 1

1. You have the following projections about the costs in a family restaurant for next year. Answer questions a and b, explaining your calculations and answer.

Net income required: 22% on the owner’s present investment of $80,000

Income tax rate is 28%

Depreciation:              Book value of furniture and equipment is $76,000,                                                                          depreciation rate is 20%.

Interest:                      Interest on a loan outstanding of $35,000 is 18%.

Known Costs:                                                              Variable Costs:

Insurance                    $ 3,000                                    Food cost, 38% of sales revenue

License                        $ 2,500                                      Wage cost, 34% of sales revenue

Utilities                        $ 8,400                                    Other costs, 18% of sales revenue

Maintenance               $ 3,600

Administration            $ 9,800

Salaries                        $41,600

a. What sales revenue would the restaurant have to achieve next year in order to acquire the desired net income?

b. What is the required average check needed to achieve the annual sales revenue objective if the restaurant is open 365 days, had 60 seats, and had an average seat turnover of 2.5 times per day?

Answer 1

a.

	Particulars	$
	Net income required($80,000 x 22%)	$                  17,600
	So above income is (1-28%) = 72% post tax. So pretax income is	$                  24,444
Add	Fixed cost
	loan interest	$                    6,300
	Depreciation	$                  15,200
	Insurance	$                    3,000
	license	$                    2,500
	Utilities	$                    8,400
	Maintenance	$                    3,600
	Administration	$                    9,800
	Salaries	$                  41,600
	Total fixed cost	$                  90,400
	Contribution( pretax income + fixed cost)	$               114,844
	Variable cost	90% sales revenue
	Contribution (sales % - Variable cost%)	10 % of revenue
	Sales revenue ($114,844 / 10%)	$            1,148,440

$1,148,440 sales revenue the restaurant have to achieve next year in order to acquire the desired net income.

b.

No. of average seat occupied in a year = No. of seats x average turnover per day x no. of days in a year

= 60 seats x 2.5 times x 365 days

= 54750 average seats

Average check required = Sales revenue required / No. of average seat occupied in a year

= $1,148,440 / 54750

$20.98 per seat per day

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