Financial Report: Review

Words: 587 Pages: 2

Table of Contents

Analysis of cost
Contribution statement
Estimation of the break-even point
Margin of safety
Overhead budget
Income statement
Balance sheet

Analysis of cost

Some of the opening costs of the restaurant will be capitalized. These start-up costs relate to the one activity of opening the restaurant and not daily operation of the business. The costs that will be capitalized are summarized in the table presented below.

	Item	Amount (ĂE)
1	Construction of customized built out	17,000
2	Restaurant tables and furniture	7,000
3	Utensils, dishes, kitchen and bar equipment	15,000
4	Restaurant opening event	5,000
5	Signage	6,000
6	Menus	2,000
7	Training and development	12,800
8	Insurance	3,000
9	Permits and licenses	4,000
10	Public relations services	3,000
11	Ordering and payment	8,000
12	Recruitment processing cost	3,000
13	Accounting costs	64,200
	Total start-up cost	150,000

Before solving the problem, it is important to calculate the accounting costs. This will be based on the assumption that the total money amounting to ĂE150,000 was spent in the opening of the restaurant. Thus, the accounting costs will be the difference between the total income and the total opening cost summarized in the table above.

Accounting costs = 150,000 – 85,800 = ĂE64,200

Contribution statement

The table presented below shows the contribution statement of the restaurant.

	ĂE	ĂE
Total income		100,000

Variable costs
Initial supply of food and beverage	3,000
Total labor cost (monthly)	62,000	-65,000
Contribution margin		35,000
Fixed costs
Other costs		15,000
Net income		20,000

Estimation of the break-even point

At the break-even point, the total sales revenue equals to the total cost. The total cost comprises of variable cost and fixed cost. The calculations of the break-even sales are illustrated below.

Break even = Fixed cost / contribution margin ratio = 15,000 / (35,000 / 100,000) = 15,000 / 0.35 = ĂE42,857.14

From the calculations above, the restaurant need to make a sales amounting to ĂE42,857.14 to enable it to adequately cover the total cost of operation.

Margin of safety

The margin of safety is calculated using the formula illustrated below.

Margin of safety in sales dollars = Budgeted sales unit – break-even sales = 100,000 – 42,857.14 = ĂE 57,142.86

The above calculations show that the margin of safety is ĂE 57,142.86. This implies that the sales of the company can fall by ĂE 57,142.86 before the restaurant reaches its break-even sales.

Overhead budget

The budget is prepared based on the assumption that there will be no change in the current values within the first three months of operation. Besides, it will be assumed that the depreciation will be recorded in the books of account at year end. The table presented below shows the overhead budget for the restaurant for a period of three months.

	Month 1	Month 2	Month 3
Variable overheads
Initial supply of food and beverage	3,000	3,000	3,000
Total labor cost (monthly)	62,000	62,000	62,000
Total variable overheads	65,000	65,000	65,000
Fixed overheads
Other costs	15,000	15,000	15,000
Total fixed overheads	15,000	15,000	15,000
Total overheads	77,000	77,000	77,000

Income statement

The table presented below shows the income statement of the restaurant for the first three months.

	Month 1	Month 2	Month 3
Total income	100,000	100,000	100,000

Cost of sales	3,000	3,000	3,000
Gross profit margin	97,000	97,000	97,000

Expenses
Total labor cost (monthly)	62,000	62,000	62,000
Other costs	15,000	15,000	15,000
Total expenses	77,000	77,000	77,000
Net income	20,000	20,000	20,000

Balance sheet

The table presented below shows the balance sheet of the restaurant for the first three months.

	Month 1	Month 2	Month 3
Assets
Start-up cost	150,000	150,000	150,000

Stockholder’s equity and liabilities
Capital	150,000	150,000	150,000