solution

A restaurant’s average monthly income statement is as follows:

The owner is considering two possible alternatives for the coming year:

â–  Alternative 1: By improving purchasing and reducing portions, cutting the food cost from 42% to 37% food sales revenue. There would be no other changes.

â–  Alternative 2: Cutting the food costs from 42% to 37% of food sales revenue and spending an additional $2,000 a month on advertising. It is estimated that the advertising would bring in extra customers and increase the volume of both food and beverage sales revenue by 20% over current levels. The extra customers would also incur extra costs over current levels as follows:

Prepare budgeted average monthly income statements for both alternatives and advise the owner which alternative you consider the best, and why.