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Problem:
The owner of a restaurant is considering two alternatives to improve operating results. The first alternative reduces food costs from 42% to 37% by improved purchasing and reduced portions. No other changes. The second alternative also cuts food costs to 37% but also spends $2,000 on advertising to increase food and beverage sales by 20%. Extra customers will cause costs to increase in these categories: $2,000 in wages, $800 in supplies, $200 in administrative, $300 in repairs and $100 in utilities. Prepare the alternative projections.
Current
Alternative I
Alternative II
Sales - Food
$40,000
Sales - Beverage
10,000
Total Sales
$50,000
Cost of Sales - Food
16,800
Cost of Sales - Beverage
3,000
Total Cost of Sales
$19,800
Gross Margin
$30,200
Operating Expenses
Wages
13,600
Supplies
4,000
Administrative & General
2,600
Advertising & Promo
1,800
Repair
900
Utilities
1,300
Depreciation
700
Interest
600
Total Expenses
$25,500
Operating Income
$4,700
20%
Added sales
37%
Cost %
30%
$2,000
Added expense
$800
$200
$300
$100
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