Yummy Burgers R Us operates a store in Melbourne City, and the following is its average monthly statement of profit or loss:

The owner is currently preparing the budget for next year and is considering the following alternatives:
1. Reducing the cost of sales for food from 50 percent to 45 percent. This would be achieved by reducing portions and improved purchasing. There would be no other changes.
2. Cutting the food cost from 50 percent to 45 percent and spending an additional $1500 on advertising. The advertising should attract new customers and increase the volume of both food and beverage revenue by 20 per cent on present levels. The new customers would also cause monthly other operating expenses to increase as follows.

Required
Prepare a budgeted average monthly statement of profit or loss for both alternatives. Advise the owner which alternative you consider best, with reasons.

Transcribed Image Text:

Revenue Food Beverages Cost of sales Food (50% of revenue) Beverages (20% of revenue) Gross profit Operating expenses Wages Operating supplies Administration Advertising Repairs and maintenance of equipment Utilities Depreciation Interest Profit before tax 50 000 15000 25000 3000 15000 5000 3000 2500 1 500 2500 1000 1000 65 000 28 000 37 000 31 500 $ 5500