Question

Study Appendix 2A. An article in Washington Business included an income statement for La Brasserie, a French restaurant in Washington, D.C. A simplified version of the statement follows:
Revenues ........... $2,098,400
Cost of sales, all variable .... 1,246,500
Gross profit .......... 851,900
Operating expenses
Variable ........... 222,380
Fixed ............. 170,940
Administrative expenses, all fixed . 451,500
Net income ........... $ 7,080

The average dinner tab at La Brasserie is $40, and the average lunch tab is $20. Assume that the variable cost of preparing and serving dinner is also twice that of a lunch. The restaurant serves twice as many lunches as dinners. Assume that the restaurant is open 305 days a year.
1. Compute the daily break-even volume in lunches and dinners for La Brasserie. Compare this to the actual volume reflected in the income statement.
2. Suppose that an extra annual advertising expenditure of $15,000 would increase the average daily volume by three dinners and six lunches, and that there is plenty of capacity to accommodate the extra business. Prepare an analysis for the management of La Brasserie, explaining whether this would be desirable.
3. La Brasserie uses only premium food, and the cost of food makes up 25% of the restaurant’s total variable costs. Use of average rather than premium ingredients could cut the food cost by 20%. Assume that La Brasserie uses average-quality ingredients and does not change its prices. How much of a drop-off in volume could it endure and still maintain the same net income? What factors in addition to revenue and costs would influence the decision about the quality of food to use?



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