82 SECTION II: MANAGEMENT ACCOUNTING CASES A major component of these strategies is to examine existing...

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82 SECTION II: MANAGEMENT ACCOUNTING CASES A major component of these strategies is to examine existing chains to identify opportunities to improve cost effectiveness. You have met with the general managers for the seven restaurant chains to intro- duce each of them to the cost-reduction project established by the board of directors. The basic information is available with Exhibits 1 to 7. In your discussions you wanted to understand the differences for sales and earnings, specifically between "company owned and managed" restaurants and those that are franchisee-managed and some- CASE 18 Foodco Restaurants times franchisce-owned. You learn that franchisees invest their own money, which allows Foodco Restaurants to finance more rapid growth. You also learn from the general managers that the non-company-owned restau- rants are less successful, as their levels of sales and earnings per store are usually less than the "company owned and managed" units. Franchisees, it was explained, are less willing to adopt the latest practices learned by the "company owned and man- aged" restaurants. When you ask for evidence of this sub-optimal performance, the general managers say that information is not systematically produced. Nevertheless, all they performance. Foodco Restaurants has joined a group of owners of restaurant chains, which has agree that restaurants not owned and managed by the company have inferior As a leading Canadian firm, Foodco has a restaurant division called Foodco Restau- rants, which has seven branded restaurant chains. Foodco Restaurants has in the last five years completed acquisitions of various small restaurant chains. In the most recent year, acquisitions of restaurants accounted for 14 percent of the system growth. Exist- ing restaurants only delivered two percent growth. The board of directors wants future growth to come from existing brands. In addition to top line or sales growth, the board of directors wants to reduce costs. They suggested a company wide cost reduc- tion initiative. Foodco Restaurants was established in 1883. It went through many changes to where it is now-one of Canada's largest restaurant operators. The seven operating chains or brands are as follows: hired a consulting firm to benchmark the performance of restaurants. The project was started during last year, and consequently only sales and earnings (before amortization of property, plant and equipment and interest expenses) benchmarks are available by restaurant type. (Note: Consulting firms often approach companies to establish industry performance standards. Each of these companies submits its financial information to the consulting firms, which develop benchmarks for the various types of industry. The information submitted by each company is kept confidential, but the consulting firms are able to present benchmarks as external performance standards. This generally would create a desire among the participants, individually or in group, to hire these consulting firms to benchmark their performance.) • Chicken Chalet, family/casual restaurant chain specializing in rotisserie chicken and barbecued ribs. Manny's, quick service restaurant chain serving hamburgers. • Betty's Neighbourhood Bar & Grill, casual dining that provides guests with an inno- vative, varied menu featuring a fun environment. • Dakota's Cookhouse, providing young families with fun, value and genuine hospital- ity featuring comfort foods in a wilderness lodge setting. • Overland Steakhouse, casual dining featuring seasoned steaks, fresh fish, etc. • Good Cup, leading specialty coffee retailer delivering superior quality, service excel- lence, and coffee passion. • Millstone Grill & Bar, casual upscale dining that provides guests with familiar food and beverages. Exhibit 1 Consolidated Statement of Earnings (S000,000s) Year T Year T-1 Systems sales" 2,400 2,105 Gross Revenue 1,530 1,411 Earnings before the following Amortization of property, plant and equipment 175 148 66 9 57 Interest expenses Foodco Restaurants' strategies for growth are straightforward: Earnings before income taxes 100 84 Provision for income taxes 30 70 25 • Lever brands • Drive geographic expansion • Maximize supply chain leverage • Increase organizational effectiveness • Develop human resources. Net income 59 Revenue recognition: Gross revenues include revenues from Foodco owned and operated foodservice activitics. These activitics consist primarily of food and beverage sales. System sales includes gross revenues as noted, together with the revenue from all fran- chised activities. 81 CASE 18: FOODCO RESTAURANTS / 83 84/ SECTION II: MANAGEMENT ACCOUNTING CASES Exhibit 2 Exhibit 4 Consolidated Balance Sheet ($000,000s) Earnings by Brand ($ millions) Year T-1 Year T Year T Year Tл Chicken Chalet 71 66 Assets Manny's Betty's Dakota's Current Assets 43 35 Cash 101 91 38 33 Accounts receivable 51 69 3 Inventories 28 29 Overland 3. 3 Good Cup Millstone Other current assets 18 15 6. 3 198 204 1 8 Interdivisional (5) (3) Property, Plant and Equipment Goodwill Brands and Other Intangible Assets 418 389 49 49 Total 175 148 175 120 762 840 * Earnings before amortization of property, plant and equipment and interest expenses. Liabilities Current Liabilities Bankers' acceptances Accounts payable, etc. 32 52 145 177 133 185 Long-Term Debt Other Long-Term Liabilities, etc. 202 160 Exhibit 5 83 66 285 226 Same Restaurant Sales Growth (percent) 462 411 Year Chicken Chalet Manny's Betty's Dakota's Overland Good Cup Millstone's Shareholders' Equity Capital Stock Retained earnings 33 31 T 1.2 1.8 (0.2) 0.7 (6.0) (0.3) 3.1 345 320 T-1 2.7 3.0 0.8 (2.4) (4.7) 4.0 0.8 378 351 840 762 Exhibit 6 Benchmark Results Per Restaurant Exhibit 3 System Sales, Gross Revenue by Brand ($000,000s) Sales, S millions Earnings", % of sales Foodco Unit Benchmark Foodco Unit Benchmark Year T Year T- Chicken Chalet 3.96 3.50 9.6 8.7 System Sales Gross Revenue System Sales Gross Revenue Manny's Betty's Dakota's 1.37 1,10 8.9 8.4 3.34 3.00 10.2 8.6 Chicken Chalet 740 393 704 393 4.15 3.90 3.6 8.3 Manny's Betty's Dakota's 482 212 457 234 Overland 4.69 6.50 0.4 8.5 371 268 322 243 Good Cup 0.82 1.10 1.9 7.9 222 191 151 118 Millstone 12.2 15.00 3.9 8.9 Overland 75 75 62 62 Good Cup 312 155 238 176 * Earnings before amortization of property, plant and equipment and interest expenses. Millstone 280 280 204 204 Interdivisional (82) (44) (33) (19) Total 2,400 1,530 2,105 1,411 Exhibit 7 Restaurants by Type of Ownership Company Owned owned and Franchisee Franchisee Owned Managed and Managed and Managed Total Chicken Chalet Manny's Betty's 30 74 63 187 58 125 168 351 67 44 111 Dakota's 28 16 54 Overland 16 16 Good Cup 20 355 382 Millstone 23 23 Total 272 206 646 1,124 The consulting firm was able to analyze the performance of Foodco Restaurants chains to determine whether "company owned and managed" restaurants were superior to the franchised restaurants. The consulting firm reported that there was not much difference between the performance means (sales and carnings) of the two types of restaurants. However, it noted that the variance was very large for these chains. There were a relatively large number of poorly performing restaurants among "company owned and franchisee managed" and "franchisee owned and managed" restaurants. Equally, there were a large number of exceptionally well-managed restaurants, with above-aver- age performance. Required You, the manager of management accounting, have been asked to scope out the project for reducing costs. Use the case approach to respond to the board of directors. 82 SECTION II: MANAGEMENT ACCOUNTING CASES A major component of these strategies is to examine existing chains to identify opportunities to improve cost effectiveness. You have met with the general managers for the seven restaurant chains to intro- duce each of them to the cost-reduction project established by the board of directors. The basic information is available with Exhibits 1 to 7. In your discussions you wanted to understand the differences for sales and earnings, specifically between "company owned and managed" restaurants and those that are franchisee-managed and some- CASE 18 Foodco Restaurants times franchisce-owned. You learn that franchisees invest their own money, which allows Foodco Restaurants to finance more rapid growth. You also learn from the general managers that the non-company-owned restau- rants are less successful, as their levels of sales and earnings per store are usually less than the "company owned and managed" units. Franchisees, it was explained, are less willing to adopt the latest practices learned by the "company owned and man- aged" restaurants. When you ask for evidence of this sub-optimal performance, the general managers say that information is not systematically produced. Nevertheless, all they performance. Foodco Restaurants has joined a group of owners of restaurant chains, which has agree that restaurants not owned and managed by the company have inferior As a leading Canadian firm, Foodco has a restaurant division called Foodco Restau- rants, which has seven branded restaurant chains. Foodco Restaurants has in the last five years completed acquisitions of various small restaurant chains. In the most recent year, acquisitions of restaurants accounted for 14 percent of the system growth. Exist- ing restaurants only delivered two percent growth. The board of directors wants future growth to come from existing brands. In addition to top line or sales growth, the board of directors wants to reduce costs. They suggested a company wide cost reduc- tion initiative. Foodco Restaurants was established in 1883. It went through many changes to where it is now-one of Canada's largest restaurant operators. The seven operating chains or brands are as follows: hired a consulting firm to benchmark the performance of restaurants. The project was started during last year, and consequently only sales and earnings (before amortization of property, plant and equipment and interest expenses) benchmarks are available by restaurant type. (Note: Consulting firms often approach companies to establish industry performance standards. Each of these companies submits its financial information to the consulting firms, which develop benchmarks for the various types of industry. The information submitted by each company is kept confidential, but the consulting firms are able to present benchmarks as external performance standards. This generally would create a desire among the participants, individually or in group, to hire these consulting firms to benchmark their performance.) • Chicken Chalet, family/casual restaurant chain specializing in rotisserie chicken and barbecued ribs. Manny's, quick service restaurant chain serving hamburgers. • Betty's Neighbourhood Bar & Grill, casual dining that provides guests with an inno- vative, varied menu featuring a fun environment. • Dakota's Cookhouse, providing young families with fun, value and genuine hospital- ity featuring comfort foods in a wilderness lodge setting. • Overland Steakhouse, casual dining featuring seasoned steaks, fresh fish, etc. • Good Cup, leading specialty coffee retailer delivering superior quality, service excel- lence, and coffee passion. • Millstone Grill & Bar, casual upscale dining that provides guests with familiar food and beverages. Exhibit 1 Consolidated Statement of Earnings (S000,000s) Year T Year T-1 Systems sales" 2,400 2,105 Gross Revenue 1,530 1,411 Earnings before the following Amortization of property, plant and equipment 175 148 66 9 57 Interest expenses Foodco Restaurants' strategies for growth are straightforward: Earnings before income taxes 100 84 Provision for income taxes 30 70 25 • Lever brands • Drive geographic expansion • Maximize supply chain leverage • Increase organizational effectiveness • Develop human resources. Net income 59 Revenue recognition: Gross revenues include revenues from Foodco owned and operated foodservice activitics. These activitics consist primarily of food and beverage sales. System sales includes gross revenues as noted, together with the revenue from all fran- chised activities. 81 CASE 18: FOODCO RESTAURANTS / 83 84/ SECTION II: MANAGEMENT ACCOUNTING CASES Exhibit 2 Exhibit 4 Consolidated Balance Sheet ($000,000s) Earnings by Brand ($ millions) Year T-1 Year T Year T Year Tл Chicken Chalet 71 66 Assets Manny's Betty's Dakota's Current Assets 43 35 Cash 101 91 38 33 Accounts receivable 51 69 3 Inventories 28 29 Overland 3. 3 Good Cup Millstone Other current assets 18 15 6. 3 198 204 1 8 Interdivisional (5) (3) Property, Plant and Equipment Goodwill Brands and Other Intangible Assets 418 389 49 49 Total 175 148 175 120 762 840 * Earnings before amortization of property, plant and equipment and interest expenses. Liabilities Current Liabilities Bankers' acceptances Accounts payable, etc. 32 52 145 177 133 185 Long-Term Debt Other Long-Term Liabilities, etc. 202 160 Exhibit 5 83 66 285 226 Same Restaurant Sales Growth (percent) 462 411 Year Chicken Chalet Manny's Betty's Dakota's Overland Good Cup Millstone's Shareholders' Equity Capital Stock Retained earnings 33 31 T 1.2 1.8 (0.2) 0.7 (6.0) (0.3) 3.1 345 320 T-1 2.7 3.0 0.8 (2.4) (4.7) 4.0 0.8 378 351 840 762 Exhibit 6 Benchmark Results Per Restaurant Exhibit 3 System Sales, Gross Revenue by Brand ($000,000s) Sales, S millions Earnings", % of sales Foodco Unit Benchmark Foodco Unit Benchmark Year T Year T- Chicken Chalet 3.96 3.50 9.6 8.7 System Sales Gross Revenue System Sales Gross Revenue Manny's Betty's Dakota's 1.37 1,10 8.9 8.4 3.34 3.00 10.2 8.6 Chicken Chalet 740 393 704 393 4.15 3.90 3.6 8.3 Manny's Betty's Dakota's 482 212 457 234 Overland 4.69 6.50 0.4 8.5 371 268 322 243 Good Cup 0.82 1.10 1.9 7.9 222 191 151 118 Millstone 12.2 15.00 3.9 8.9 Overland 75 75 62 62 Good Cup 312 155 238 176 * Earnings before amortization of property, plant and equipment and interest expenses. Millstone 280 280 204 204 Interdivisional (82) (44) (33) (19) Total 2,400 1,530 2,105 1,411 Exhibit 7 Restaurants by Type of Ownership Company Owned owned and Franchisee Franchisee Owned Managed and Managed and Managed Total Chicken Chalet Manny's Betty's 30 74 63 187 58 125 168 351 67 44 111 Dakota's 28 16 54 Overland 16 16 Good Cup 20 355 382 Millstone 23 23 Total 272 206 646 1,124 The consulting firm was able to analyze the performance of Foodco Restaurants chains to determine whether "company owned and managed" restaurants were superior to the franchised restaurants. The consulting firm reported that there was not much difference between the performance means (sales and carnings) of the two types of restaurants. However, it noted that the variance was very large for these chains. There were a relatively large number of poorly performing restaurants among "company owned and franchisee managed" and "franchisee owned and managed" restaurants. Equally, there were a large number of exceptionally well-managed restaurants, with above-aver- age performance. Required You, the manager of management accounting, have been asked to scope out the project for reducing costs. Use the case approach to respond to the board of directors.

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FoodCo restaurant has done major mergers and acquisitions in the recent past to boost their growth w... View the full answer