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Answered 3 days After Jun 04, 2022

Solution

Rochak answered on Jun 07 2022
75 Votes
1. Overview of past performance
The past performance for both Melbourne (Appendix A) and Cairns (Appendix B) gives an overview of how each restaurant has been performing and has performed in the past 2 years. It is clear from the comparative analysis that Liberty Melbourne is performing better than the other restaurants majorly because of the growth in operating costs being less than the growth in overall restaurant sales. Also, for Liberty Cairns, the main problem in the past two operating years is the sales not being able to cover the operating expense which means that the company has still not reached the
eakeven point and therefore they are a loss-making entity.
The company must look at various aspects of both the restaurants focusing more on Liberty Cairns to make it profitable otherwise the firm will keep losing money in that
anch. The first thing which should be reviewed is the operating expenses to see if they can be reduced, if not the company should focus on increasing the sales using various techniques such as increasing the price or acquiring more customers.
For Liberty Melbourne, though the company is doing good the firm should look to increase sales (i.e., cash sales) because although the firm is profitable, they are not able to generate those sales through cash and therefore the firm has a negative net operating cash flow from operating activities. So, the first thing the firm should look at is the credit cycle both from the receivables and payables perspective, from receivables the firm should look to decrease the credit cycle. In contrast, from the payables the firm should look to negotiate with suppliers to get a more extended credit cycle, this will help the firm to need less working capital and generate more cash flow from operating activities.
2. Overview of budget changes
2.1 Budget Rationale and Assumptions
The budget developed for the next year (i.e., year 4) is based on the assumption that the Quarter 3 will be the one Quarter in which the sales will rise exponentially because of the holiday and festival seasons and therefore the budget takes into account growth of 20% than the actual quarterly sales over the previous years in this quarter. Quarter 1 is expected to be an underperforming quarter because of many reasons and therefore it is assumed that the sales will be below average where it has been assumed that the sales will be 20% lower than the average sales. The remaining which are quarters 2 and 4 will be average quarters for the restaurant and therefore the sales will be average of the last year’s sales (i.e., Sales Year 3).
Food and Beverage costs will be incu
ed in direct proportion to the sales, on a percentage basis.
The costs have been assumed to be mostly stagnant throughout the year because they will be incu
ed i
espective of the sales. The costs are assumed to be the average of what the yearly cost looked like in the previous year. Costs which have been assumed to be stagnant are:
· Advertising
· Bank Service Charge
· Credit Card Fees
· Insurances
· Payroll
· Professional Fees
· Rent or Lease
· Hospitality Supplies
· Licenses
· Utilities and Telephone
· Equipment Leases
· Maintenance
The operating expense which is ‘Software System Upgrade’ is assumed to be incu
ed at the start of quarter 2 because quarter two is the peak quarter for the restaurant
2.2 Application of accounting principles
The matching principle is applied while budgeting the beverage and food costs as it is assumed that the cost will be in direct proportion to the sales.
All the other operating expenses have been grouped under one category and budgeted that they will be incu
ed i
espective of the sales which the company has, and therefore these expenses have a constant value across the four quarters of the budgeted year.
The budget assumes that quarter 3 will be the best and therefore that is budgeted to have sales of more than 20% of the average sales. Quarter 1 will be underperforming and therefore the quarter has a sale of less than 20% of the average. The other two quarters which are 2 and 4 will have average sales.
2.3 Contingency
The contingency that can impact the budget is ‘Beverage and Food Cost’, this can impact the budget because the cost will be incu
ed at the start of the quarter and will depend on...
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