Solution manual managerial accounting and finance for hospitality OperationsCHAPTER 08

CHAPTER RELEVANT REVENUE, COSTS AND DECISION-MAKING I Questions Price-cutting Method Price cutting occurs when prices are reduced below those of the competition This can be a risky method if it ignores costs, because if variable costs are higher than prices, profits will be eroded Some restaurant operators set their food menu prices below costs on the risky assumption they will more than make up the losses by profits on alcoholic beverage sales To use this method, the reduction in prices must be more than compensated by selling additional products If the extra business gained is simply taken away from competitors, they will also be forced to reduce their prices and a price war may result Competitive Method Competitive pricing means matching prices to those of the competition and then differentiating in such areas as location, atmosphere, and other nonprice factors When there is one dominant operator in the market that generally takes the lead in establishing prices, with its close competitors matching increases and decreases, this method is then referred to as the followthe-leader method Competitive pricing tends to ensure there is no price cutting and resulting reduction in profits In other words, there is market price stability This may be a useful method in the short run However, if competitive pricing is used without knowledge of the differences that exist (in such matters as product and costs) between one establishment and another, then this method can be risky Markup Method The markup method is used, for example, when a restaurant’s traditional food cost percentage (as it appears on past income statements) is applied to determine the price of any new menu items offered For example, if traditionally the restaurant has been operating at a 40% food cost, any new menu items offered will be priced so that they also result in a 40% food cost The major problem with this method is that it assumes that 40% is the correct food cost for the restaurant to achieve its desired profit Factors considered include the menu price ranges needed to accommodate clientele catered to; gross margin of different menu items; and pricing of the competition Food cost percentage is important to menu pricing to ensure that the selling price is high enough to cover the cost of food and provide a profit margin 8-2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Menu engineering is a sophisticated and fairly complex approach that considers both the profitability and popularity of competing menu items Average room rate is determined by dividing the Rooms Department Revenue by Rooms expected to be sold Refer to page 192 II Practical Exercises and Problems A EXERCISES EXERCISE Actual room rates vary Some customers may choose rooms with higher rate because of the amenities available while some may choose rooms with lower rates EXERCISE P28,000 – 0.20 = Operating income P28,000 0.80 = = P35,000 EXERCISE Assume that level of operation is at break-even point and “x” represents total revenue: x – 0.84x – P145,000 = 0.16x = x = P145,000 P906,250 EXERCISE Average check P46,800 88 x 2.5 x 26 = = P46,800 5,720 = P8.18 EXERCISE = 0.65 x P988,000 108 x 1.75 x 312 Relevant Revenue, Costs and Decision-Making Average check, dinner = P642,200 58,968 = P10.89 EXERCISE Room double occupancy percentage = = 10,512 – 8,760 = 1,752 1,752 8,760 = 20% EXERCISE Rooms to be sold = = = Rooms available x Occupancy rate x 365 40 x 70% x 365 10,220 P388,350 10,220 Average room rate = EXERCISE Singles = Doubles 40 – 15 = 25 15 25x + 15 (x + 80) = 25x + 15x + 1,200 = – 1,200 40x = 40 x double B PROBLEMS PROBLEM Requirement (1) P18,800 P18,800 – 1,200 P17,600 40 = P440 (single) = = P440 + P80 P520 = P38.00 8-3 8-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Multiple = / 0.30 = Chicken Delight Pork Squeal Steak Supreme 3.33 Ingredient Cost P2.50 P2.75 P3.75 Multiple 3.33 3.33 3.33 New Price P 8.33 P 9.16 P12.49 Requirement (2) Refer to the discussion on mark-up approaches to pricing on pages 190 to 192 PROBLEM Requirement (1) Sandwich Pork Barrel Lamb Leg Chicken Breast Burger Delight Super Burger Roast Beef Ocean Catch Tuna Salad Egg Salad Cheese Mix TOTAL SALES Selling Price P3.95 3.75 3.95 3.45 4.95 4.95 4.45 3.50 3.25 2.95 Number Sold 50 40 150 300 190 250 200 175 150 60 Cost P1.30 1.00 1.40 0.85 1.25 1.50 1.20 0.60 0.35 0.40 Number Sold 50 40 150 300 190 250 200 175 150 60 P 197.50 150.00 592.50 1,035.00 940.50 1,237.50 890.00 612.50 487.50 177.00 P6,320.00 Requirement (2) Sandwich Pork Barrel Lamb Leg Chicken Breast Burger Delight Super Burger Roast Beef Ocean Catch Tuna Salad Egg Salad Cheese Mix TOTAL COST Requirement (3) Food cost percentage = P1,604 P6,320 = 25.38% P 65.00 40.00 210.00 255.00 237.50 375.00 240.00 105.00 52.50 24.00 P1,604.00 Relevant Revenue, Costs and Decision-Making 8-5 Requirement (4) Total Sales Less: Total Costs Total Contribution Margin Divide by: Total number sold Average Contribution Margin P6,320.00 1,604.00 P4,716.00 ÷ 1,565 P 3.01 PROBLEM Requirement (1) Alternative Chicken Fish Pork chops Steak Selling Price P 5.95 P 6.95 P 8.95 P11.95 Food Cost P1.78 P2.43 P3.58 P5.97 Meals Sold 400 300 200 100 1,000 Selling Price P 5.95 P 6.95 P 8.95 P11.95 Food Cost P1.78 P2.43 P3.58 P5.97 Meals Sold 350 300 200 150 1,000 Selling Price P 5.95 P 6.95 P 8.95 P11.95 Food Cost P1.78 P2.43 P3.58 P5.97 Meals Sold 100 150 250 500 1,000 Revenue P2,380.00 2,085.00 1,790.00 1,195.00 P7,450.00 Total Cost of Food P 712.00 729.00 716.00 597.00 P2,754.00 Gross Profit P1,668.00 1,356.00 1,074.00 598.00 P4,696.00 Revenue P2,082.50 2,085.00 1,790.00 1,792.50 P7,750.00 Total Cost of Food P 623.00 729.00 716.00 895.50 P2,963.50 Gross Profit P1,459.50 1,356.00 1,074.00 897.00 P4,786.50 Total Cost of Revenue Food P 595.00 P 178.00 1,042.50 364.50 2,237.50 895.00 5,975.00 2,985.00 P9,850.00 P4,422.50 Food Gross Cost Profit Percentage Gross Profit P 417.00 678.00 1,342.50 2,990.00 P5,427.50 Gross Margin Per Meal Alternative Chicken Fish Pork chops Steak Alternative Chicken Fish Pork chops Steak Sales Mix Alternativ e Total Revenue Total Cost of Food 8-6 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations P7,450 7,750 9,850 P2,754.00 2,963.50 4,422.50 P4,696.00 4,786.50 5,427.50 36.97% 38.24% 44.90% P4.70 4.80 5.40 Requirement (2) Sales Mix # is preferred because it yields the highest gross profit PROBLEM Requirement (a) Return on owner investment: Net income after tax = P80,000 x 0.15 = P12,000 Calculation of Income before tax: NI after tax – Tax rate = Income before tax NI after tax – Tax rate = P12,000 – 0.25 = P12,000 0.75 Sales revenue Food cost Wage cost Other costs Salaries Administration Maintenance Utilities License Insurance Interest Depreciation Desired operating profit before tax Total S = = = ? P32,400 9,800 3,600 Fixed 8,400 Costs 2,500 3,000 2,800 15,100 16,000 P93,600 = 18% P77,600 + P16,000 18% P93,600 18% P16,000 = P520,000 100% (36%) (34%) (12%) Relevant Revenue, Costs and Decision-Making Sales revenue (P93,600 / 0.18) Food cost, wage cost and other costs (P520,000 x 0.82) Contributory income P520,000 (426,400) P 93,600 Total operating costs including interest Income (before tax) Income tax Net income (77,600) P 16,000 (4,000) P 12,000 Requirement (b) Average check = = P520,000 60 x 2.5 x 365 P520,000 54,750 = P9.50 8-7 ...8-2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Menu engineering is a sophisticated and fairly complex approach that considers both the profitability and popularity... 1,200 P17,600 40 = P440 (single) = = P440 + P80 P520 = P38.00 8-3 8-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Multiple = / 0.30 = Chicken Delight Pork Squeal... chops Steak Sales Mix Alternativ e Total Revenue Total Cost of Food 8-6 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations P7,450 7,750 9,850 P2,754.00 2,963.50 4,422.50