Reference no: EM133348436

Case Study: In June 2022, Robert and Alex Keller decided to examine the prospect of operating a restaurant. The
brothers had always dreamed of being entrepreneurs and had an interest in the restaurant industry. After some preliminary groundwork, they thought it would be a good idea to become more familiar with the costs in operating a restaurant. They were able to gather from various contacts and sources, the estimate of a number of costs.
In order to keep capital requirements to a minimum, the brothers decided to lease rather than purchase a property. A discussion with a local real estate company indicated that a suitable downtown location was
available at an annual rental fee of $54,000. Extensive renovations would be necessary to prepare the
facility to create the appropriate atmosphere. A building contractor estimated that $75,000 would be
required. Finally the brothers budgeted $5,000 total promotion budget for an initial advertising campaign and $1,500 for licensing fees.
Their great friend Judy Martin is very interested in managing kitchen operations. Her duties would include inventory control, kitchen supervision, and staff management. Robert and Alex are very receptive to the idea as this would allow them more time to concentrate on the promotion of the business. They agreed to a salary of $75,000 per year. The brothers also plan to draw initial salaries of $25,000 each.
An equipment dealer indicated that kitchen fixtures and utensils would cost $25,000. Depreciation would be calculated using the straight line method over a useful life of 10 years with no residual value. Wages for waiters and waitresses and other kitchen and restaurant staff, according to industry averages, would be 18% of total sales. A 2% cushion for theft, credit card charges, etc. was also typical for the industry. In addition, a margin of 60% was expected on food sales. Other restaurant costs are outlined below.
Annual Restaurant Forecasted Operating Costs
Chef $30,000
Utilities 4,200
Insurance 10,000
Telephone and Reservation System 5,000
Property/Business Tax 9,000
Paper products 6,000
Miscellaneous 7,500
Robert and Alex were pleased with their initial research, but were unsure how to use the information to evaluate the riskiness of the venture. Armed with your accounting knowledge, you have been asked to help Robert and Alex assess the riskiness of the venture. Specifically, you are asked to:

Questions:

1. Analyze the behaviour of costs in the venture (fixed, variable, mixed, sunk, differential, etc.)
2. What would the revenue have to be for Robert and Alex to recover their initial fix-up costs of $75,000?
3. What could Robert and Alex do to reduce the riskiness of the venture?
4. What additional information would you like to have in order to further enhance and evaluate the venture? Based on Kellers' Freehouse (B) page 8-11, Cases in Management Accounting, Kudar, R., Kantor, J. & Mimick, R. (1995).