Restaurant Capacity Decision_Mengheng Li

Restaurant Capacity Decision_Mengheng Li - Grandmothers...

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Unformatted text preview: Grandmothers Chicken Restaurant is experiencing a boom in business. The owner expects to serve 80,000 meals this year. Although the kitchen is operating at 100 percent capacity, the dining room can handle 105,000 diners per year. Forecasted demand for the next five years is 90,000 meals for next year, followed by a 10,000-meal increase in each of the succeeding years. One alternative is to expand both the kitchen and the dining room now, bringing their capacities up to 130,000 meals per year. The initial investment would be $200,000, made at the end of this year (year 0). The average meal is priced at $10, and the before-tax profit margin is 20 percent. The 20 percent figure was arrived at by determining that, for each $10 meal, $8 covers variable costs and the remaining $2 goes to pretax profit. Two new alternatives have come up for expanding Grandmother's Chicken Restaurant. They involve more automation in the kitchen and feature a special cooking process that retains the original-recipe taste of the chicken. Although the process is more capital intensive, it would drive down labor costs, so the pretax profit for all sales (not just the sales from the capacity added) would go up from 20 to 22 percent. This gain would increase the pretax profit by 2 percent of each sales dollar through $800,000 (80,000 meals x $10) and by 22 percent of each sales dollar between $800,000 and the new capacity limit. Alternative 2: Expand both the kitchen and the dining area now (at the end of year 0), raising the capacity to 130,000 meals per year. The cost of construction, including the new automation, would be $336,000 (rather than the earlier $200,000). Alternative 3: Expand only the kitchen now, raising its capacity to 105,000 meals per year. At the end of year 3, expand both the kitchen and the dining area to the 130,000 meals-per-year volume. Construction and equipment costs would be $424,000, with $220,000 at the end of year 0 and the remainder at the end of year 3. As with alternative 2 (the first of the two "new"), the contribution margin would go up to 22 percent. With both new alternatives, the salvage value would be negligible. Compare the cash flows of all alternatives while assuming a 10% discount rate. Answer each question on a seperate worksheet 1) Should Grandmother's Chicken Restaurant expand with the new or the old technology? Should it expand now or later? 2)What would the bid for the expansion at the end of year 3 need to come in order to make ALT 3 the most profitable? 3)What new pretax profit rate would using the mechanical equipment need to provide in order to make ALT 2 the most profitable alternative? 4)At what discount rate will ALT 2 be as profitable as ALT 1? Demand 1 2 3 4 5 Assumptions All Alternatives 80,000 90,000 100,000 110,000 120,000 130,000 Dining Room 105,000 Kitchen 80,000 Cash Outflow 1 2 3 4 5 ALT 1 $200,000.00 Meal Price $10.00 ALT 2 $336,000.00 ALT 3 $220,000.00 $204,000.00 BTPM 20% Current Profit $2.00 Capacity...
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Restaurant Capacity Decision_Mengheng Li - Grandmothers...

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