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.
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Current
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Alternative I
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Alternative II
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Sales - Food
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$40,000
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$40,000
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Sales - Beverage
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10,000
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10,000
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Total Sales
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$50,000
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Cost of Sales - Food
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16,800
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Cost of Sales - Beverage
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3,000
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Total Cost of Sales
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$19,800
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Gross Margin
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$30,200
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Operating Expenses
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Wages
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13,600
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13,600
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Supplies
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4,000
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4,000
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Administrative & General
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2,600
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2,600
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Advertising & Promo
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1,800
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1,800
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Repair
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900
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900
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Utilities
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1,300
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1,300
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Depreciation
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700
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700
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700
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Interest
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600
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600
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600
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Total Expenses
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$25,500
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$25,500
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Operating Income
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$4,700
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Alternative I
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Alternative II
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20%
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Added sales
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20%
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Added sales
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37%
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37%
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Cost %
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30%
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30%
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Cost %
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$2,000
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Added expense
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$800
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Added expense
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$200
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Added expense
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$2,000
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Added expense
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$300
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Added expense
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$100
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Added expense
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Advise the owner on which alternative to select and why.