High and low points for the Restaurant Division

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Using the budget and actual numbers as the high and low points for the Restaurant Division, the variable and fixed portion of the Waitress and Busboy Wages Set out in a cost equation will be:

X Y

Highest level 194,400 18,000

Lowest level 167,040 15,368

27,360 2,632

Slope = Dy = 2,632 = 0.09

Dx 27,360

Substitute lowest value (167,040, 15,368)

Y = a + bx

15,368 = a + 0.09 (167,040)

a = 334

Therefore Y = 334 + 0.09x

Question Two

The high-low method will give you a quick idea of which costs are fixed and which costs are variable; however, to get more accurate estimates in the future, the restaurant manager should record the costs in distinct categories when they are incurred. They should be classified either as fixed or variable depending on how they are incurred.

It is important to know which costs are fixed and which are variable for control purposes. Costs must be classified by behaviour for comparing actual and budgeted performance using flexible budgets. Also by classifying costs into fixed and variable categories, the outcomes from different activity levels can be examined. Classification of costs by behaviour also helps in allocating costs between cost of goods sold and inventories for internal and external profit measurement and inventory valuations, providing relevant information to help managers to make better decisions and providing information for planning, control and performance measurement.

Question Three

The major cost driver for the restaurant division is (volume) the total of food and liquor sales. The logical assumption about the fixed cost is said to be fixed if that cost tends to remain unchanged in total despite even relatively wide fluctuations in levels of output or activity; Managers' Salaries, Building Allocation and Administration. A variable cost is said to be variable if the total cost changes in proportion to changes in the levels of output or activity; Cost of Sales on food and liquor, Waitress & Busboy Wages, Supplies and Dish Washing.

Total revenue = SQ

Total cost = VR + F

At Break event point SQ = VQ +F where F = Total Fixed Cost

Q = F S = selling price

S-V V = Variable costs

Fixed costs = \$ 98, 728

Variable costs = 91,746; per unit = \$ 15.93

BEP (units) = F

S-V

BEP units = 98, 728

13.07

= 7,552

BEP in sales Dollars = \$ 219,028

In order to make a profit, the restaurant division must make sales of 7,552 units apart from increasing the price to \$ 29. This is more than 31% of the current unit sales and around 5% more than the budgeted sales. This implies that the restaurant needs more activity to generate profits which is unlikely to happen in the current situation.

Question Four

The restaurant should adopt an income statement where the costs are divided among fixed and variable. The income statement should also include figures on which costs relate to the hotel and the ones that are allocated from the head office. This will not only measure the performance of the hotel but it will also measure how the manager is controlling costs in the head office.

The ratio of the costs in management, administration and building that relate to the hotel and the head office should also be indicated so that the contribution of the hotel to settling head office costs is shown properly.

The income statement should have the following format:

Sales

Variable costs

Contribution

Fixed costs:

Hotel

Operating income

All numbers should be reported with the actual figures. For the allocated figures from the head office, they should be reported on aggregate. For the costs appertaining to the hotel, their unit costs should be shown.

Question Five

The Restaurant Division should not be closed. This is because the restaurant can be attracting customers for the rooms division which would mean that its closure will have a negative impact on the profit of the Rooms Division. The restaurant also helps the other profit making centre to cater for the head office costs. If the restaurant is closed, the head office overheads allocated to it will be met by the other divisions which will make them report losses also.

The business is at a low and spring is the lowest month for the restaurant. Considering this implies that there are better tomes ahead.

The restaurant was allocated 64,100 as administration expenses some of them from the head office, 5,000 as managerââ‚¬â„¢s salaries and 29,628 as building allocation costs. If it is closed, these costs will be borne by the other divisions and will consume the 5,750 profit of the room division.

Question Six

Cost drivers that exist in admiralââ‚¬â„¢s hotel are; activity based, volume based, structural, and executional cost drivers. Activity-based cost drivers are at the detail level of operations, for example, equipment setup, materials handling, and clerical or other tasks. On the other hand, volume-based cost drivers are at the aggregate level, that is, they relate usually to the number of units produced. The cost of the activity increases as more units are processed. Structural cost drivers involve plans and decisions having long-term effects; executional cost drivers have short-term decision frames. The most important volume-based concepts are variable costs, which change according to a change in the level of output, and fixed costs, which do not. Direct costs are defined as costs that can be traced directly to a cost object in contrast to indirect costs, which cannot.

At the restaurant, examples of these cost drivers are the following:

Activity based: linen, telephone rental.

Volume based: number of visitors in the room division

Structural: building space allocated to each division

Executional: dish washing

Question Seven

A productivity measure for the Restaurant Division;

The best productivity measure is the contribution margin ration. This is sales price less the variable cost per unit.

Contribution margin = 29 -15.93

Contribution margin ratio = 45%

The contribution margin is important since show the manager what is left to cater for fixed operating costs and expenses when all the direct expenses have been catered for. This therefore implies the level where fixed costs should not exceed if the business is supposed to break even.

Question Eight

The general manager uses volume as the basis of controls. This method is not the best in this situation since volume do not always result in productivity. The manager should be using cost per unit of sale as the basis and at the same time focusing on allocated and costs incurred by the divisions as separate categories as control centres. The manager should supply performance reports which compare actual performance with the planned performance and which therefore highlight those activities which are not conforming to plan. He should also control the costs as per their behaviour to ensure that all type of costs is kept under check.

For control purposes, management requires estimates of costs and revenues at different levels of activity for the alternative courses of action.