Question

As a recently hired MBA intern, you are working in a consulting capacity to provide an analysis for Al Dente's Italian Restaurant. A financial income Statement is presented below:

Sales $4,640,560

Cost of sales (all variable) $2,679,008

Gross Margin $1,961,553 Operating expenses:

Variable $478,117

Fixed $367,521

Total operating expenses: $845,638

Administative expenses (all fixed) $970,725

Net operating income $145,190

This income statement presents the sales, expenses and pre-tax operating income for a local eating facility. At Al Dente, the average meal cost for lunches and dinners are $20 and $40 respectively. Al Dente serves both lunch and dinner 300 days per year and serves twice as many lunches as dinners. As the MBA intern you are to prepare a managerial accounting focused report to the owners of Al Dente's Italian Restaurant, to include the following

5. In order to increase NOI, the owner of the restaurant is considering adjustments to the quality of food ingredients currently used. Rather than using premium ingredients, use of average quality ingredients would reduce the cost of food by 15%. The owner proposes to not change the current meal pricing. As the consultant, prepare a memo to the owner that presents the pros and cons of this change in operations. What are the potential impacts on revenue, costs, and net operating income may result from this change? The owner does not want to see a decrease in net operating income. Could the owner make this change and absorb a decrease in customers, and how would you demonstrate numerically to support your analysis? What other factors or consequences of this decision should the owner consider besides the financial impact of the change? Hint: this qualitative analysis is to be thorough. Expect to present 400 words or so, and support your analysis using calculated or given accounting data. Please show how you got the calculations!!!

Answer 1

I will be presenting my answer with 2 excel calculations, which will be explaining clearly about the impact of change in cost. Basic impact on net operating income on the cost cutting factor.

How there is a increase in Net Operating income and by how much the change is.

The cost has been deducted by 15% in total, this will be deducted from the variable Operating expenses as the fixed cost can't be changed, which is Operating Fixed Expenses and Administrative Expenses.

Currently with the above data and without any changes we are having Net Operating income of $145,189. This operating income is with $478,117 Operating Expenses (Variable).

Please find below the calculation of after cost deduction of 15%.

Post deduction of cost and keeping the same price and supplying to same number of customers our Net Operating Income has been increased by $71,718.

Please find below screenshots of calculations for your reference.

In below excel sheet there are 2 tables made. In first table it is shown that calculation has been done before the change in cost in which Net Operating Income=$145,189, whereas after deduction in cost the Net Operating Income=$216,907. There has been increment in total Net Operating Income by=$71,718