John and Denise’s Restaurant

Question:

Background:
John and his wife Denise opened their cafe 3 years ago. They initially started their small café selling “a bit of coffee and cake” at the back of their renovated cottage. The café, situated on the south-west coast of WA, required an investment of $225,000.
As a result of local demand, John and his wife extended the café and shifted their focus to cater for the local appetite for healthy hamburgers prepared with fresh, local ingredients. They produce and sell 3 sizes of hamburger: small, regular, and large, all of which are served with fries and a Coke. In their restaurant, apart from direct labour workers, John and Denise employ 4 staff – 2 chefs, and 2 waiters ($2500, each, permonth).
Product sales, costs and other information for 2018, are shown in the following table:

Note: variable overhead costs represent the cost of other ingredients.
Currently:
John and Denise are currently thinking of extending their business by opening a second restaurant. Due to the growing number of tourists and students coming to Tasmania, they are considered it to be an ideal place to set up this business. The couple have two choices: either to purchase a property in Hobart or rent one. If they go with the first, they envisage financing the cost of buying the property ($450,000) and converting it, with a home loan.
John and Denise have now approached you, a highly capable and reputable team of management and cost accountants, based in Hobart. They have chosen your team because of your excellent reputation, and knowledge of local council regulations, and have provided you with the following cost estimates (including General Sales Tax) of converting the property (if they choose to buy a property):

John and Denise advise you that irrespective of the option they finally choose (buying a property or renting one), they will buy standard furniture and fittings at a cost of $25 000. They estimate that these will have to be replaced every 10 years. They also plan to purchase kitchen equipment for $100,000, to be financed by a bank overdraft. This equipment will also need to be replaced at10-yearly intervals.
John and Denise estimate that their first-year sales in Hobart will be 20% lower than those in their WA business, but that these will increase by 10% per year. Apart from direct labour workers, they plan to hire 3 staff, one to cook, who will receive a salary of $2500 per month, and two to fill orders (2.5 % commission for each), as well as a supervisor, who will receive a salary of $3,000 per month. They aim to make profit no less than $50 000 per year.
The couple ask you to research the financial viability of the proposed project.
You are required to:

1. respond to this request by developing an excel workbook;
2. use this excel workbook to determine, for each of the options, the breakeven point, in dollars and numbers, for the expected product mix;
3. determine the annual profit for years 1, 2 and 3, for both options, and decide, in each case, which of the existing burgers should be promoted more aggressively than the others to achieve the target profit;
4. calculate, for both options, the payback period for John and Denise’s investment;
5. advise John and Denise, in a written business report, whether they could maximise profitability by changing sale prices or the mix of existing sales, or both. Your advice must be supported by your excel workbook calculations and qualitative evidence;

Before starting to develop your excel workbook, you need to estimate the following costs:

1. estimate the cost of water usage.
2. estimate the cost of interest
3. estimate the cost of the electricity usage.
4. estimate the cost of the rent.

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